Citigroup Says Commodity Markets Yet to Price In Rate Hike

  • Fed seen making initial increase in December, Szpakowski says
  • Dollar may gain next month after payrolls data, analyst says

Think the global commodity markets have fully priced in prospects for higher U.S. interest rates this year? Think again, says Citigroup Inc., which says keep an eye out for payrolls numbers due next month and prospects for an even stronger dollar.

“We’re fast approaching December: we very much expect the first rate hike to take place at that point,” Ivan Szpakowski, a commodities strategist at Citigroup, told a conference in Shanghai in Thursday. “We think the market is already pricing that to some degree for sure. It’s pricing it in also to a degree. But not the full extent, not to 100 percent.”

Commodities have sunk to the lowest level in 16 years as investors grapple with the prospects for the first increase in U.S. borrowing costs since 2006, a slowing Chinese economy and surpluses of everything from oil and iron ore to aluminum. Minutes of Federal Reserve meeting in October, released on Wednesday, showed that policy makers inserted language to stress a move in December may happen. Szpakowski flagged the possibility of strong employment data next month, which may boost the dollar.

‘Very Strong’

“Potentially, when you have a very strong non-farm payrolls number in early December, at which point the market would likely price in 95 percent chance of that hike, you will see the dollar strengthen more,” said Szpakowski, who’s based in Hong Kong and tracks commodity-market developments in China including oil, iron ore and base metals.

At present, investors see a 66 percent chance of a rate rise next month, up from 50 percent at the end of October, according to data tracked by Bloomberg. Higher U.S. rates typically boost the dollar, which makes commodities priced in the greenback more expensive to holders of other currencies.

The Bloomberg Commodity Index, which tracks metals, energy and farm products, sank to 81.1246 on Wednesday, the lowest level since 1999. The gauge has slumped 22 percent this year to head for a fifth annual loss. Copper, nickel and zinc dropped to multiyear lows in London on Thursday as crude oil in New York traded near a three-month low.

After the initial increase from the U.S. central bank, the pace of tightening was likely to be restrained, according to Szpakowski. “We think the future pace of rate hikes is likely to be very slow,” he said.

— With assistance by Martin Ritchie

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