Too soon to call a price rally

Commodity prices surged late in the week on the back of a slump in the US dollar, a fall in US real yields and some easing of COVID-related restrictions in China. However, we doubt that this heralds the start of a renewed upturn in prices. The weaker-than-expected US CPI data for October won’t on their own persuade the Fed to drop its hawkish tone and we expect further rate rises in the coming months. We are also cautious about the lifting of some COVID-related restrictions in China. It is obviously an attempt to contain the negative economic impact of restrictions, but it does not mean the zero-COVID policy is being abandoned. On the contrary, if cases rise further, restrictions may intensify again.

The focus will remain on China next week with the release of October activity and spending data on Tuesday. We expect particular weakness in retail sales given the pick-up in virus outbreaks, but industrial activity is likely to have held up better, which should offer some support to metals prices.

Otherwise, we expect commodity prices to take the lead from moves in the US dollar and wider risk sentiment. If Fed officials push back against market optimism about falling inflation, commodity prices could very easily give back their recent gains.