August 2023: US Retail Inflation Impacts Metal Market

In the dynamic world of finance and economics, keeping an eye on key indicators and their impact on various sectors is paramount. The recent US retail inflation report for August 2023 has sent ripples through the financial market, especially among those closely following the metals market. 

Key Implications

• Inflation Takes A Surprising Turn: The report revealed a core inflation increase of 0.3% over August 23, which was faster than the expected 0.2% rise. Additionally, the headline inflation, which encompasses energy and food, accelerated to 3.7% year-on-year. These figures managed to push up US yields and give a slight boost to the US Dollar.
• Muted Market Reaction: Despite these inflationary trends, the market’s response has been relatively muted. This raises questions about why the financial market, which had been celebrating a decline in inflation over the past year, is now seemingly indifferent to its recent resurgence.

• Range Bound Metal Prices: Interestingly, the metals market has largely ignored the US inflation data. Let’s take a closer look at some key metals:
  • Copper: It remained below the $8400 mark for most of the day but experienced an uptick in the late London afternoon. Prices showed little reaction to a 7750 tons inventory inflow, which boosted LME inventories to a 2-year high. This lack of response might be attributed to spread tightness observed around the third Wednesday of September, October, November, and December 2023, indicating crowded short positions among traders. The relatively tight Copper Cash-3m spreads, in the range of $19-22 billion, are expected to attract more inventory inflows in the coming days and weeks.
  • Aluminium: The price fluctuated around the $2200 mark, with the potential to test levels between $2230-40 shortly. This anticipation hinges on inventory inflows expected in the coming week and beyond.
  • Zinc: It has encountered resistance above the $2500 mark throughout the month. However, today saw buyers stepping in after LME’s stock report indicated 5350 tons of warrant cancellations. Prices once again rose above $2500. Sustaining this level may require more withdrawal requests in the days ahead.
  • Lead: The prices drifted lower, and spreads eased further, with the Cash-3m spread falling to $30-40 billion (down from $58 billion on 11th September). Reduced buying pressure to cover nearby shorts played a role in this decline. Further drops in metal spreads may be on the horizon, potentially pulling 3-month prices back into the $2100-2150 range.
  • Nickel: It faced downward pressure due to substantial inventory inflow, amounting to 462 tons. The appearance of newly registered Chinese brands in Asian warehouses is expected to continue throughout the year, exerting ongoing pressure on prices.
  • Tin: It managed to stay just above the $25,000 mark while witnessing a continuous increase in LME inventories, which have reached their highest level since April 2020, totalling 6975 tons. This surge in inventories has contributed to a rather dull physical metal market.

Market Outlook

Traders are currently engaged in position adjustments as they prepare for expiring contracts over the next two weeks. This period of transition may result in fluctuating prices on alternate days.

In essence, the metals market is currently divided, with both bullish and bearish positions prevailing in most metals. These market participants eagerly await unexpected data or developments that could alter their stance. Until such a game-changing event occurs, we can anticipate sideways metal price movement.

It’s essential to note that rising inventories in LME warehouses, except for Zinc, and the strengthening US Dollar continue to undermine the metals market. Furthermore, the peak season of demand for metals in the northern hemisphere is coming to an end in September 2023, which may slow down the physical market. Consequently, metal prices remain susceptible to a potential dip in the next quarter.

OFB’s Insight 

The US retail inflation report for August 2023 has injected some uncertainty into the metals market, with traders closely monitoring developments for potential shifts in market dynamics. As we move forward, staying informed and agile in response to changing conditions will be crucial for industry players.