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Executive summary │ US interest rate cuts and commodities
Commodities outperform when the Fed cuts during soft landings
When the Fed cuts, commodities rise – especially during soft landings
Selectively constructive across the commodities complex post Fed cuts
Commodities best positioned in late cycles
- The US economy is en route towards a soft landing. Inflation is trending towards the Federal Reserve’s (Fed) 2% inflation target, and growth is cooling (not collapsing). Fed Chair Powell’s remarks at the Jackson Hole symposium last month left no room for ambiguity on the direction for policy rates, with the Fed set to deliver the first non-recessionary interest rate cut on 18 September.
- By combining a structural modelling approach and market reaction functions around FOMC meetings, we parameterise the impact on commodity prices from lower interest rates driven by an accommodative Fed stance, spurred by a soft (not hard) landing.
- This distinction matters as the impact on commodities from rate cuts is conditional on the cyclical context. Commodities enjoy positive returns during a “good” cutting cycle (growth firm, declining inflation), and vice versa, suffer negative returns during a “bad” cutting cycle (growth decelerating, sticky inflation).
- Examining commodity sub-groups, we recommend selective tactical positioning to harvest returns in an era where inflation is nearing target, no signs of an imminent US recession and markets are pricing in a soft landing:
- Energy (neutral). The commitment by OPEC+ to keep the futures curve backwardated, alongside still robust DM crude demand that will be supplemented further by lower rates, should offer positive returns for oil – though it is difficult to build oil deficits with China’s malaise screaming louder. Meanwhile, we find no statistically significant price effects for natural gas from Fed cuts, where today’s bearish micro factors (benign inventories and weather), outweigh rates effects.
- Base metals (bullish). High rates have been a critical headwind to base metals, driving a significant negative physical demand distortion from destocking and weighing on capital intensive end-demand segments. In that context, the sharp rates unwind in a soft landing environment offers good entry given late cycle driven scarcity, a tentative revival in global manufacturing and attractive returns.
- Precious metals (bullish). Whilst gold normally performs best in hard landing recessionary easing cycles (as investors seek protection against tail risks), we see significant value in long gold positions in today’s soft landing scenario. A confluence of unprecedented central bank demand, bullion-backed ETFs expanding, the risk of inflationary US policies after the elections from shocks including tariffs, debt apprehensions and bullion’s role as the geopolitical hedge of first resort, reinforce why gold remains our most bullish commodities conviction going into and after the Fed begins its easing cycle.
- Agriculture (neutral-to-bearish). Returns are mixed with an unambiguous post first Fed cut pattern across both hard and soft agricultural commodities – bearish micro fundamentals matter more (akin to natural gas).
- All in, we are entering a turn in the US rates cycle for the first time since July 2019. With this turn comes a new and more supportive macro environment, with commodities outperforming every major asset class in the 12 months post-Fed cuts when the landing has been “soft”. We hold conviction that history will repeat itself, with commodities historically proving to be the best asset class to own during the late phase of the business cycle – though, we recommend a more selective, less constructive, tactical approach to commodity investing.
