Copper Helped by Fed Pause Hint

Fed Pause Hint

The US Federal Reserve raised rates by 25 basis points on Wednesday and reiterated its resolve to fight inflation, while not ruling out further firming if necessary ^[1]. However, the central bank made a "meaningful change" to its statement, according to Chair Powell. ^[2]

In a dovish shift, it removed the previous guidance for "some additional policy firming may be appropriate", opening the door to a pause and suggesting that the terminal rate may have been reached.

Markets meanwhile anticipate cuts ahead, with CME's FedWatch Tool assigning the highest probability to rates dropping to 4.5% by the end the year (from current 5.25%) ^[3]. Fed Chair dismissed these expectations though, saying that such action "would not be appropriate" based on the forecasts of policymakers. ^[2]

US Slowdown

The banking turmoil and the ensuing credit tightening, push policymakers towards a less aggressive approach, while still having to deal with high inflation and strong labor market. These developments, along with other factors, have also increased fears of an economic downturn.

The Fed's staff projected a "mild recession" for the current year, as revealed by the accounts of the previous meeting ^[4], but Chair Powell is more optimistic, expecting the economy to grow at a "modest rate". In last month's report, the International Monetary Fund (IMF) forecast expansion of 1.6%, marking slowdown from 2022 (+2.1%). ^[5]

China Recovery

The People's Republic of China is one of the world's most important consumers of copper and the biggest importer, according to 2021 data from the World Bank ^[6]. Economic activity was hampered by the zero-Covid policies, but the country abandoned this restrictive approach a few months back.

The government expects a significant recovery this year, with GDP growth target of around 5%, from just 3% in 2022 ^[7], while the IMF forecasts an expansion of 5.2%. During the first quarter, the economy grew by 4.5% y/y and the strongest print in a year, which along with other strong indicators show that the recovery is well underway.

However, other data suggest that the recovery maybe sluggish. Factory activity was boosted at the start of the year, but contracted again in April, as Manufacturing PMI fell to 49.2. China is also the biggest importer of oil and the recent output cuts of OPEC+ could hamper the country's reopening. The International Energy Agency (IEA) believes that those oil output reductions will create a supple deficit that "augurs badly for the economic recovery and growth" ^[8]

Copper Analysis

Copper comes from a losing April, as markets grappled with recession fears and the fallout of the SVB collapse in the US, bumpy China reopening and restrictive monetary policy. This creates risk for fresh 2023 lows (3.706), but sustained weakness past the ascending trendline from the 2022 lows (around 3.580) has a higher degree of difficulty.

The Fed opened the door to a pause of its aggressive tightening policy and markets hope for rate cuts ahead, which help Copper, China is still expected to grow at a strong pace this year. The metal has the ability to reclaim the EMA200 (at around 4,000), but the upside does not looks hospitable, as the daily Ichimokou Cloud looms ahead of the April highs (4.196).