‘Free Fall’: Nightmare Coming Our Way As Iron Ore Price Bottoms Out

Commodity

Summary:

The golden goose of the Australian economy is taking a hammering and it could spell big trouble for everyday Aussies.

The backbone of Australia’s export economy that generates a massive proportion of Australia’s tax dollars is in free fall as our most precious commodity — iron ore — sinks to worryingly new lows.

The red dirt is the golden goose of the Australian economy and pockets the nation $124 billion a year.

It is used to make steel, which in turn is used to create buildings, infrastructure, ships, trains, cars, machines and electrical appliances.

It’s all stuff that China smashes out in massive numbers and it means our two countries are bound together on iron ore in a mutual dependency.

However, this week a major problem has hit the nation’s miners as iron ore fell to the lowest price since October — after dropping almost 9 per cent last week alone.

This is bad news for everyday Aussies as WA’s iron ore miners contribute a major proportion of Australia’s tax take — estimated to be nearly 18 per cent of the nationwide total tax income.

If you look back to the start of the year, it was estimated a multi-month surge in iron ore prices would deliver Treasurer Jim Chalmers as much as $18 billion in extra tax revenue.

This raised hopes of a second federal budget surplus and funding another round of subsidies for voters.

At that time, iron ore had rallied to $US145 per tonne, its highest price since April 2022. It was hoped that China’s economic recovery was gaining momentum thanks to a combination of monetary and fiscal stimulus.

However, expectations have now come crashing down as the money hasn’t been forthcoming from Beijing.

Bloomberg reports local governments in China have so far appeared reluctant or unable to borrow more. That’s fuelling expectations Beijing may pick up the slack and take on more debt.

As a consequence, the price has slid 12 per cent at the start of the year — with the price now sitting at $US127.

MB Fund and MB Super chief strategist David Llewellyn-Smith said iron ore was in “free fall”.

But it could get much, much worse.

The biggest concern outside of China’s woes is that an iron ore oversupply is likely to flood the market from next year as the massive Simandou mine in Africa starts exporting and delivering ore.

According to Forbes, a well-connected Australian fund manager said the increase in iron ore supply could potentially knock $US50 a tonne off the price, driving it down to around $US80.

If correct, the analysis of Yarra Capital could trigger a 49 per cent fall in the earnings of Aussie mining giants BHP and Rio Tinto and a 65 per cent fall in the earnings of Fortescue. ‘Free Fall’: Nightmare Coming Our Way As Iron Ore Price Bottoms Out_1

‘Free Fall’: Nightmare Coming Our Way As Iron Ore Price Bottoms Out_1

The slump in China has come at a bad time too given that March and April are typically busy months for construction.

In a move that is sparking concern Vale SA, the world’s second-largest iron ore producer, is looking to increase its sales outside of China. This means miners are worried China may not bounce back as previously expected.

In fact, experts say China’s economy is in the doldrums.

Losses on the Shanghai stock market on Monday came despite Beijing saying it wanted to boost sales of cars, appliances and other consumer products in “piecemeal incentives to stimulate the economy,” noted National Australia Bank senior currencies strategist Rodrigo Catril.

Government interventions have stabilised the market, with Chinese stocks rebounding from early February lows.

But underlying weakness means “investors are crying out for larger economic supports to be rolled out,” Moody’s Analytics economist Harry Murphy Cruise told AFP.

Market players are watching to see if extra spending and an ambitious growth target will be announced in March to help China’s economy gain momentum through the year, according to Mr Cruise.

In Australia meanwhile, the market has reacted poorly to the news coming out of China.

BHP’s share price has dropped 5.93 per cent in the past month and Rio Tinto’s has dropped 7.14 per cent over the same period.

Source：news

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Zi Cheng

Traders' Opinions

Economic

In January, inflation remained unchanged at a two-year low, supported by declining prices for meat and seafood, fueling speculation that the Reserve Bank might accelerate interest rate cuts.

According to the Australian Bureau of Statistics, the consumer price index for January stood at 3.4%. Economists had projected an increase to 3.6% from December's 3.4%.

Australia CPI Unexpectedly Lower Than Forecast At 3.4%_1

Annual inflation in the food and non-alcoholic beverages category saw a slight uptick to 4.4% last month from 4% in December. However, prices for meat and seafood experienced a 2% decrease compared to the previous year, slightly deeper than December's 1.9% decline.

Government intervention also played a role in mitigating some of the price escalations. For example, in January, electricity prices were 0.8% higher than the previous year, with rebates helping to temper the increase.

"Excluding the impact of rebates, electricity prices would have surged by 15.3% over the twelve months leading to January 2024," noted Michelle Marquardt, head of prices statistics at the ABS.

Meanwhile, rental costs continued their significant upward trajectory, matching December's 7.4% increase from January 2023, as vacancy rates remained historically low in certain capitals.

Treasurer Jim Chalmers highlighted the government's role in mitigating rent increases, stating that rents would have risen by 9.1% without the Commonwealth Rent Assistance boost. Chalmers emphasized that while inflation trends were encouraging, challenges persisted for households.

Monthly CPI data can exhibit greater volatility compared to quarterly figures due to the partial nature of the ABS survey of goods and services. Nevertheless, they offer insights into inflationary pressures within the economy.

The Reserve Bank aims to ensure that inflation remains on track to return within its target range of 2%-3% by next year and around 2.5% by 2026. Despite raising its cash rate 13 times between May 2022 and November 2023 to a 12-year high of 4.35%, the bank observed in the minutes from its February board meeting that goods price inflation had declined more than anticipated, while services inflation remained elevated and was expected to decrease gradually.

Ahead of the CPI release, investors estimated a minimal 5% chance of a rate cut by the RBA at its upcoming meeting on 18-19 March, according to the ASX's rates tracker. Following a review of its operations released last year, the RBA board will now convene eight times a year instead of eleven.

Market reactions to today's CPI figures were subdued, with the Australian dollar holding steady near 65.5 US cents, and the stock market maintaining its slight losses for the day, hovering around 0.1%.

To stay updated on all economic events of today, please check out our Economic calendar

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Zi Cheng

Traders' Opinions

Economic

New Zealand's central bank decided to leave interest rates untouched and eased its stance on potential rate hikes in response to indications of diminishing inflationary pressures. Consequently, the domestic currency experienced a decline.

On Wednesday in Wellington, the Reserve Bank's Monetary Policy Committee, as anticipated by 22 out of 24 economists surveyed by Bloomberg, maintained the Official Cash Rate at 5.5%. The bank's latest projections suggest a slightly reduced likelihood of a rate hike occurring this year, with no anticipated cuts until 2025.

New Zealand Keep Interest Rate Same As Previous At 5.5%_1

The RBNZ is hesitant to consider a shift towards monetary easing due to the enduring nature of price pressures, coupled with concerns that heightened inflation expectations might solidify. New Zealand's inflation rate, standing at 4.7%, significantly surpasses the bank's 2% target and exceeds that of numerous comparable economies.

The RBNZ anticipates that annual consumer price index inflation will align with its target range by the third quarter of 2024.

In its statement, the RBNZ emphasized the necessity of maintaining current tight monetary policy measures to mitigate the risk of inflation expectations rising, while simultaneously avoiding undue volatility in output, employment, interest rates, and the exchange rate.

Furthermore, the central bank acknowledged that persistent factors such as high interest rates, stubborn inflation, and subdued international demand continue to apply pressure on the New Zealand economy, contributing to a tempering effect on inflationary trends.

Following the RBNZ's decision, the New Zealand dollar depreciated by 0.8%, as the bank's stance was perceived as less hawkish than what the markets had anticipated. Notably, the RBNZ refrained from signaling any further interest rate hikes during this announcement.

Between August 2021 and May 2023, the RBNZ had increased its official cash rate by a cumulative 525 basis points, positioning itself as one of the first major central banks to address the post-COVID surge in inflation.

However, the progression of major cyclones in early 2023 disrupted the bank's efforts to combat inflation to some extent, as price pressures surged in the aftermath of reconstruction efforts following these disasters.

The central bank anticipates modest economic growth for the current year, reassuring that the economy will avoid recession, supported by robust immigration levels. New Zealand witnessed its most significant annual population increase since the conclusion of World War II in 2023.

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Samantha Luan

Oil prices slipped in early Asian trade on Wednesday as the prospect of a delayed U.S. rate cutting cycle offset the boost provided by talk of extensions to production cuts from OPEC+.

Brent crude futures fell 38 cents, or 0.45%, to $83.27 a barrel by 0110 GMT, while U.S. West Texas Intermediate crude futures (WTI) were down 35 cents, or 0.44%, to $78.52 a barrel.

Investor sentiment has continued to be influenced by signals of a later start to U.S. rate cuts due to concerns over persistent inflation.

On Tuesday, Federal Reserve Governor Michelle Bowman signalled she is in no rush to cut U.S. interest rates, particularly given upside risks to inflation that could stall progress on controlling price pressures or even lead to their resurgence.

This followed similar remarks from Kansas City Federal Reserve Bank President Jeffrey Schmid on Monday. High borrowing costs typically reduce economic growth and oil demand.

On Tuesday, U.S. President Biden said Israel has agreed to halt military activities in Gaza for the Muslim holy month of Ramadan. However, Israel and Hamas as well as Qatari mediators all sounded notes of caution about progress towards a truce in Gaza.

Attacks on ships in the Red Sea by Iran-aligned Houthis in Yemen in support of the Palestinians have increased freight rates and shipping times. A negotiated ceasefire in Gaza could lead to easing tensions in the global shipping artery.

Prices for both crude benchmarks rose more than $1 per barrel on Tuesday after Reuters reported that the Organization of the Petroleum Exporting Countries and allies led by Russia (OPEC+) will consider extending voluntary oil output cuts into the second quarter, to provide additional support for the market. Two sources said the cuts could be in place until the end of the year.

Last November, OPEC+ agreed to voluntary cuts totalling about 2.2 million barrels per day (bpd) for the first quarter this year, led by Saudi Arabia rolling over its own voluntary cut.

Also on Tuesday, Russian authorities announced a six-month ban on gasoline exports from March 1 to compensate for rising demand from consumers and farmers and to allow for planned maintenance of refineries.

Source:Reuters

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Samantha Luan

Economic

American consumers are feeling less confident this month as concerns over a possible recession grew despite most recent data pointing to a healthy U.S. economy.

The Conference Board, a business research group, said Tuesday that its consumer confidence index fell to 106.7 from a revised 110.9 in January. Analysts had been forecasting that the index remained steady from January to February. The decline in the index comes after three straight months of improvement.

The index measures both Americans’ assessment of current economic conditions and their outlook for the next six months.

The index measuring Americans short-term expectations for income, business and the job market fell to 79.8 from 81.5 in January. A reading under 80 often signals an upcoming recession.

Consumers’ view of current conditions also retreated, falling to 147.2 from 154.9.

The decline in consumer confidence this month comes as somewhat of a surprise as the economy continues to show resilience in the face of higher interest rates and inflation. Though price growth has receded considerably in the past year, inflation remains above the Federal Reserve’s 2% target.

Consumer spending accounts for about 70% of U.S. economic activity, so economists pay close attention to consumer behavior as they take measure of the broader economy.

Overall, confidence is barely above the average from last year, which was 105.4, according to Stephen Stanley, an economist at Santander, a bank.

Americans were slightly less worried about food and gas prices last month, the Conference Board said, but expressed more concern about jobs and the ongoing presidential campaign.

Consumers’ expectations of future inflation fell to their lowest level since March 2020. Lower inflation expectations are a positive sign because they can become self-fulfilling: If people expect prices to rise rapidly in the months ahead, they may accelerate their purchases, which can fuel more price hikes.

Yet even as inflation concerns wane, the proportion of Americans who said jobs were “easy to get” fell.

“In the case of jobs, the market is still strong, it’s just much less strong than a year ago when job swapping for higher pay was easy,” said Robert Frick, an economist at the Navy Federal Credit Union. “And now the contentious election season is coming closer into view, and national elections strongly influence perceptions of the economy.”

In a bid to combat four-decade high inflation in the wake of the pandemic, the Federal Reserve raised its benchmark rate 11 times beginning in March 2022. However, the central bank has left rates alone at its last four meetings and is expected to start cutting rates later this year, which is expected to further boost an already strong economy.

The government reported last month that the nation’s economy grew at an unexpectedly brisk 3.3% annual pace from October through December as Americans showed a continued willingness to spend freely.

Despite some recent high-profile layoffs, the labor market continues to churn out jobs. U.S. employers added 353,000 jobs in January and the unemployment rate stayed at 3.7%, just above a half-century low.

Though most economists did not anticipate a decline in consumer confidence this month, there doesn’t appear to be great concern that an uptick in pessimism will be sustained.

“Overall, consumers are set to benefit from declining interest rates as the Fed starts to lower the target range this year,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, “which should be supportive of sentiment over time.”

In another contradictory twist, the number of people in the Conference Board’s survey who said they planned to make a big-ticket purchase like a car or major appliance in the next six months rose.

Source：Newslooks

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Alex

Commodity

Forex

Gold price modestly gains but is stuck in a narrow range in Tuesday's mid-North American session, underpinned by the fall in US Treasury bond yields. Consequently, the Greenback (USD) weakens, as the US Dollar Index (DXY), which tracks the currency against six other currencies, drops 0.05%. At the time of writing, XAU/USD trades at $2,034.88, gaining 0.18%.

The yellow metal hovers around the 50-day Simple Moving Average (SMA) at $2,033.48 as investors brace for the release of the latest Personal Consumption Expenditures (PCE) report, the Federal Reserve’s (Fed) gauge to measure inflation. That and the latest Gross Domestic Product (GDP) data could be the catalysts that prompt Gold’s price to exit the trading range within the $2,020-$2,050 area.

Earlier, the US Department of Commerce revealed that Durable Goods Orders in January plummeted sharply even worse than expected, which could set the tone for Q1 2024 GDP data. Meanwhile, Home Prices data were mixed as buyer demand picked up.

Daily digest market movers: Gold advance prompted by soft US Dollar undermined by lower US yields

US Durable Goods Orders dropped -6.1% MoM, more than the -4.5% contraction expected and the -0.3% dip observed in December.

The S&P/Case Shiller Home Price Index for December rose 6.1% YoY, outpacing estimates of 6% and November’s 5.4% reading.

Previous data releases in the week:US New Home Sales rose by 1.5% from 0.651M to 0.661M, less than the 0.68M expected.The Dallas Fed Manufacturing Index for February contracted -11.3 though it improved compared to January’s -27.4 shrinkage, suggesting that business activity is recovering.

Federal Reserve Governor Michelle Bowman said she’s in no rush to cut rates, given upside risks to inflation that could stall progress or cause a resurgence in price pressure.

Bowman said that inflation would decline “slowly,” adding that she will remain “cautious in my approach to considering future changes in the stance of policy.”

Interest rate speculators have priced out a Fed rate cut in March and May. For June, the odds of a 25 basis point rate cut are at 49.7%.

Investors are pricing in 85 basis points of easing throughout 2024.

Technical analysis: Gold stays firm near 50-day SMA

Gold is trading sideways as XAU/USD has failed to break above the $2,035 psychological resistance level for the last 12 days. Nevertheless, the upward bias remains intact, and if buyers reclaim the $2,035 level, that could open the door to challenge the psychological $2,050 figure. Key resistance levels up next would be the February 1 high at $2,065.60, ahead of the December 28 high at $2,088.48.

On the flipside, if Gold falls below the February 16 swing low of $2,016.15, XAU/USD would dive toward the October 27 daily high-turned-support at $2,009.42. Once cleared, that will expose key technical support levels like the 100-day SMA at $2,009.56, followed by the 200-day SMA at $1,967.09.

Source：FXStreet

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Chandan Gupta

Traders' Opinions

Commodity

In the latest developments on the commodities front, gold futures faced a setback at the onset of the final trading week in February. The futures market held its ground against expectations of a pivotal move by the US Federal Reserve in the ongoing tightening cycle. Investors are on high alert as they brace for two pivotal reports this week - the US GDP and inflation figures.

Gold's current standing places it around the resistance level of $2036 per ounce. Weekly gains of approximately 1% have been achieved, yet a year-to-date decrease of 1.4% has been noted since the beginning of the year. Meanwhile, its sibling commodity, silver, dipped below $23 per ounce, marking a 3.7% decline last week and contributing to a 6% loss since the year's commencement.

The market sentiment took a hit as expectations grew regarding a delay in further US interest rate cuts. Federal Reserve policymakers hinted at the possibility of maintaining a patient approach, potentially keeping US interest rates elevated for a prolonged period. This has led to a shift in investor expectations, with a 52% likelihood now placed on a US interest rate cut in June, contrary to earlier predictions of a cut in early March.

The impact is evident in the rising yields on US Treasury bonds, with the ten-year bond reaching 4.27%, a 2 basis point increase in the two-year bond to 4.71%, and stability in the thirty-year bond yield at 4.38%. Gold, being sensitive to interest rate fluctuations, faces challenges as it grapples with the changing economic landscape.

Investors are closely monitoring two crucial data points this week - the second estimate of US GDP for Q4, expected to be 3.3%, and the Personal Consumption Expenditures (PCE) Price Index, anticipated to rise by 0.3%. The Core PCE Price Index, excluding volatile energy and food components, is expected to increase by 0.4%.

Despite a weaker US dollar, gold failed to capitalize on the situation. The US Dollar Index (DXY) fell to 103.84, down from the opening at 103.94. Although the DXY recorded a 0.5% drop last week, it remains up by 2.5% year to date. The falling US dollar typically benefits dollar-denominated goods, making them more affordable for foreign investors. However, the intricate relationship between gold and the US dollar continues to evolve.

In other metal markets, copper futures retreated to $3.828 per pound, while Platinum futures and Palladium futures dropped to $884.90 and $968.00 per ounce, respectively.

From a technical standpoint, our analysis suggests no significant shift in the upward trend of gold prices. The daily chart indicates a series of narrow trading sessions, hinting at an impending strong movement in one of the two directions. The outcome of crucial American economic data this week is expected to trigger a robust reaction, potentially influencing the stability of the US dollar and, consequently, the performance of gold.

As we assess the current scenario, the nearest resistance levels for gold stand at $2055 and $2070, offering potential control for bulls. Conversely, a deviation from the current trend would necessitate a move towards support levels of $2000 and $1985 per ounce.

In conclusion, the intricate dance between economic indicators, market sentiment, and global events continues to shape the trajectory of gold and silver prices. The coming days promise both challenges and opportunities, with investors keenly awaiting the unfolding economic landscape. XAU/USD Gold Price Indicates Impending Strong Surge in Performance Signals_1