Source: BIS

A concise summary of what’s moving markets, the impact on base, precious and ferrous markets, including Theme of the Day.

What’s moving markets?

• US equities made only modest gains ahead of the main driver which is today’s April PCE report. The Fed’s preferred inflation measure is seen jumping to 2.9% in April, the highest since 1993, while any reading much above expectations could force the US central bank to rethink the timing to exit its extremely loose monetary policy. Bond yields gained whilst the USD moved lower.
• New applications for unemployment aid in the US fell to a fresh pandemic-era low last week, signalling that the labour market continues to heal. Fitch Ratings have stated that it would take about 18 months for the labour market to return to full steam. The number of jobless claims filed for regular state programmes decreased by 38k in the week ending 22 May to 406k, the US labour department said, while core capital goods orders rose 2.3% in April, the commerce department said. The data comes as policy makers seem to be getting more confident about the economic outlook with both Fed Vice Chair Richard Clarida and Fed Vice Chairman for Supervision Randal Quarles saying the time to start discussing scaling back assets purchases at FOMC meetings is getting close.
• Precious metals were mixed, gold, silver and palladium ended higher on the day while platinum fell. Gold held close to $1,900 ahead of today’s PCE inflation data, underpinned by a weaker USD as Treasury yields strengthened on fears of rising inflation expectations.
• Base metals put in a much stronger performance, most were up over 2%, after a week of losses. Copper was underpinned by upbeat US economic data and the threat of strikes spreading to other mines in top copper producer Chile – an indefinite strike has started at BHP’s Integrated Operations Center in Santiago de Chile, which controls operations at the Escondida and Spence mines. Further consolidation ahead of month-end looks likely before the uptrend resumes amid much reduced positioning. Although Chinese authorities have railed against surging metals prices, a rising currency might be helping to reduce inflationary pressures (see Theme of the Day).
• Iron ore bounced on Thursday after the raw material fell into a bear market – defined as losses of 20% or more – on the back of Chinese rhetoric to curb prices. Regulatory headwinds were compounded by signs of weaker fundamentals. Shipments from Australia rose to 19.1Mt in the week to 21 May, according to Global Ports data and the highest level since 1 January. Rising steel scrap prices also suggest steel mills are targeting the material in an effort to reduce the impact of high iron ore prices.

Theme of the Day: Is China using its currency to reduce inflationary pressures?

• China’s currency hit its strongest level against the dollar in three years, reaching Rmb6.40 per USD, its highest point since June 2018. The yuan (CNY or RMB) has gained more than 10% over the past year, buoyed by China’s economic rebound from the coronavirus pandemic and foreign capital flows into the country, according to the Financial Times. A PBoC official has said the central bank should let the RMB rise to combat higher commodity prices.
• Beijing has become concerned over rising commodity prices, which in April drove growth in China’s factory gate prices to their highest in three years, raising the prospect of higher consumer price inflation. The state council, chaired by Premier Li Keqiang, said last week that measures should be taken to avoid producer prices feeding through into consumer prices.
• Chinese rhetoric to curb rising commodity prices has intensified over the past few weeks as China’s authorities are trying to shield margins at manufacturers due to problems of passing on higher costs. Fundamental supply and demand factors are in control and driving prices to sustainable, albeit elevated, levels. Speculative activity is only serving to reinforce an already well established trend.  
• A stronger Chinese currency would make it cheaper for the country’s industrial producers to buy raw materials – the country is a big importer of most industrial metals – but typically hurts its exporters as they become less price competitive. The strength of the country’s currency poses a challenge as Beijing tries to maintain economic growth momentum amid recent signs that growth (and credit) has peaked, while at the same time seeking to quell asset bubbles in the property sector, stock markets and other asset classes.
• The PBoC expected the exchange rate to be “stable” and driven by supply and demand, as well as international market conditions, according to comments posted to the bank’s website. The PBoC has recognized that RMB appreciation would help control inflation as well as foster a planned shift in economic focus away from external and towards domestic demand. At the same time, it has also recognized the geopolitical merits of attaining reserve currency status (backed by rising gold reserves) – and this is likely to continue.
• It is likely the yuan will gradually appreciate in coming months, given expected USD weakness and support from the Communist Party’s 100th anniversary this year (1 July). Beijing though would want to see slower yuan appreciation to support the economy, which is still fairly dependent on selling goods abroad.