Commodities Daily - January 31, 2022

> Oil prices stabilize near YTD highs amid downbeat economic data from US and China. Investors today will be focused on the first print of 4Q21 GDP from the eurozone and the EIA's monthly 914 report, which will provide an estimate of US oil and gas production in November. In our view, Brent is likely to continue consolidating near YTD highs today, as it has run out of momentum and now faces headwinds from Sunday's official data from China showing a drop in manufacturing output and consumer spending in January amid the recent Covid-19 outbreaks.> Gold prices decrease slightly after PCE inflation data. Gold slipped from $1,795/oz to $1,790/oz on Friday, while the US 10y Treasury yield slid from 1.81% to 1.79%. Gold is trading near $1,790/oz as we write. Today, markets await 4Q21 GDP from the eurozone, along with January readings of the Chicago PMI and Dallas Fed manufacturing index from the US. We expect bullion to test support at $1,785/oz today.> Base metals move lower, with copper plunging the most; iron ore drops as Chinese authorities step in. Base metals moved lower on Friday, with copper leading the losses, as investors were still taking stock of the outcome to the Fed meeting. Iron ore finally seems to be reversing, as the Chinese authorities have stepped in to "crack down on speculation."OIL PRICES STABILIZE NEAR YTD HIGHS AMID DOWNBEAT ECONOMIC DATA FROM US AND CHINAOn Friday, Brent rallied $1.7/bbl to as high as $91.7/bbl, but it then eased back toward $90/bbl on data showing that US consumer spending fell and consumer prices rose in December (in fact, the core PCE deflator printed at the highest level since 1983). The data suggested that the US economy was losing momentum heading into the new year amid snarled supply chains and surging Covid-19 cases. Moreover, US consumer sentiment deteriorated further in late January, with the University of Michigan's sentiment index dropping to the lowest level in more than a decade as concerns over inflation and the Omicron variant continued to dim the economic outlook. The final December reading of the index was 67.2, the lowest since November 2011 and down from 70.6 a month earlier and a preliminary reading of 68.8. In the survey, three quarters of Americans indicated that inflation was the biggest problem for the economy. Economists expect the recent surge in Covid cases to weigh on economic growth in 1Q22, which will weigh on oil demand somewhat. Americans have delayed their return to the office and reduced their spending on in-person services such as travel and entertainment. Still, economists remain generally upbeat on the economy in subsequent periods, as they foresee an ease in inflationary pressures and supply chain issues. Front-month Brent eventually settled at $90.03/bbl on Friday, fixing $0.69/bbl above the previous settlement. This morning, the expiring Brent contract for March is hovering above $91/bbl, while the April contract is trading near $89.5/bbl, supported by the continued tensions over Ukraine. Investors today will be focused on the first print of 4Q21 GDP from the eurozone and the EIA's monthly 914 report, which will provide an estimate of US oil and gas production in November. In our view, Brent is likely to continue consolidating near YTD highs today, as it has run out of momentum and now faces headwinds from Sunday's official data from China showing a drop in manufacturing output and consumer spending in January amid the recent Covid-19 outbreaks. Beijing is seeking to stabilize the Chinese economy ahead of a key political leadership meeting later this year. The central bank has already cut interest rates, and officials are pledging more fiscal support.This week, OPEC+ will gather on Wednesday to determine how the group will manage supplies going forward. Delegates say they expect OPEC+ to rubber-stamp a continuation of the existing plan to add 0.4 mln bpd per month, though we note that last month the coalition added just 60% of the planned amount. If members such as Saudi Arabia do not offer assurance that they can make up for last month's shortfall, this could increase the likelihood of further price gains. In our view, Brent is likely to register new YTD highs in the first half of the week. However, we expect oil prices to run out of steam later in the week and believe the risks from the OPEC+ meeting are skewed to the LD PRICES DECREASE SLIGHTLY AFTER PCE INFLATION DATAGold slipped from $1,795/oz to $1,790/oz on Friday, while the US 10y Treasury yield slid from 1.81% to 1.79%. EUR/USD traded sideways near 1.114. Friday's macro statistics did not really surprise investors but nonetheless provided headwinds for gold, while Fed speakers came out in favor of more aggressive monetary policy. The December PCE deflator readings from the US were more or less in line with expectations at 0.4% m-o-m and 5.8% y-o-y, while core PCE inflation (excluding volatile food and energy prices) printed at 0.5% m-o-m (the same as the consensus) and 4.9% y-o-y (slightly above expectations). Price growth continued to accelerate, reaching the highest level in nearly 40 years. Meanwhile, US personal incomes and spending failed to keep up with inflation in December, most likely due primarily to the spread of Omicron. Bullion remained under strong pressure following the data release, as the higher price growth helped build the case for more aggressive monetary policy from the Fed. Moreover, Atlanta Fed President Raphael Bostic commented on Sunday that there could be a 50 bp rate hike at the next FOMC meeting in mid-March if the data indicates that is necessary. During the Asian trading session today, gold was quoted near $1,790/oz. Today's data releases include 4Q21 GDP from the eurozone, along with the January readings of the Chicago PMI and Dallas Fed manufacturing index from the US. The highlights on this week's agenda are the January US jobs report on Friday, the January ADP US employment report on Wednesday, and the ECB meeting and press conference on Thursday. We will also see January Markit PMIs from a range of DMs, the January ISM PMI from the US, January inflation readings from Europe, and the December JOLTS report from the US. Today, gold may continue to decline amid potentially upbeat macro data and potentially hawkish comments from San Francisco Fed President Mary Daly and Kansas City Fed President Esther George. We expect bullion to test support at $1,785/oz. SE METALS MOVE LOWER, WITH COPPER PLUNGING THE MOST; IRON ORE DROPS AS CHINESE AUTHORITIES STEP INBase metals traded lower on Friday. Three-month LME copper contracts slid 2.81% (-$274 from the previous day's close) to $9,508/tonne, aluminum dropped 0.57% (-$16) to $3,083/tonne, nickel eased 0.29% (-$57) to $22,332/tonne, while zinc declined 0.58% (-$21) to $3,610/tonne.Base metals moved south as investors were still taking stock of the outcome to the Fed meeting. Copper led the losses, sliding 4.4% in total last week, as the market consensus shifted to five US interest rate hikes this year. The Fed's tighter than expected action and hawkish rhetoric pushed the dollar higher, putting a lid on dollar-denominated commodities. Copper, being a bellwether of global economic health, tumbled the most, as investors are expecting the global economic recovery to slow this year due to monetary tightening in the US and a slowing economy in China. We expect base metals to exhibit moderate volatility this week (in contrast to last's week rollercoaster ride), as China is on holidays and traders are also taking a rest.Iron ore futures in Singapore are down 7% as we write. Iron ore prices recently revisited the highs reached last June, before a correction started. A two-and-a-half-month rally that commenced in mid-November surprised not only most analysts, but also the Chinese government. Prices have surged by 72% since mid-November, which has unnerved Beijing, prompting the National Development and Reform Commission to say late Friday that it would crack down on speculation and study "further effective measures" to ensure "smooth operation of iron ore prices." History has shown that Chinese state interventions often cool the market (for example, last year's reaction from thermal coal and base metals to interventions by the authorities). With this in mind, we believe that iron ore futures might have started a reversal, with the spot price likely to keep sliding in the days to come. A level of $132/tonne (200d MA) will be the first support, which if broken through will pave the way to $120/tonne (50d MA)