The most anticipated news of the week was the Fed’s decision. To hike or not to hike?
It came as no surprise that the Fed did hike. It increased its benchmark rate by 25 basis points (bps) on Wednesday.
But it wasn’t the only decision Jerome Powell’s Fed released.
He kept the max Fed funds rate target at 5.1% this year. In other words, the Fed expects only one more 25 bps hike this year.
Some saw this as a “semi-pivot,” or a slowdown from the rapid interest rate hiking marathon that started in early 2022. But it also meant no rate cuts until the end of the year. That isn’t very comforting for the economy running hot.
As a result, the ongoing restrictive policy from Fed led US stocks to end the day in the red. Equity investors don’t like higher rates.
Investors see more troubles ahead, especially in the financial sector, which is very sensitive to the rapid rise in interest rates.
Financials may continue falling after the initial shock triggered by Silicon Valley Bank (SVB) and Signature Bank, followed by the emergency rescue of Credit Suisse. The risk remains high, and investors are in fear.
Luckily, not everything is falling apart…
The Mining Sector Is Stabilizing
Last week, Moody’s, a rating agency, updated its outlook for the mining industry. It raised the rating for the entire sector from negative to stable.
First, the mining industry is getting support from China’s reopening. China is a major consumer of raw materials. The country wrestled with COVID-19 longer than others, and its economy has been stagnating for months.
Having fully reopened, China is ramping up its industrial output and is becoming hungry for raw materials.
Moody also discussed that the US and Europe are supportive of mining. The recent Inflation Reduction Act passed in the US should support the metals vital for the green energy transition in the US. It applies to both critical minerals, such as lithium, cobalt, and nickel, and the niche ones, like vanadium and rare earth elements.
Europe is following the same path. Last week, it added copper to its own list of critical metals. The metal is in short supply and is a key component for electric vehicles (EV), power grids, and other green energy-related trends. European countries are especially vulnerable to copper supply shocks. Government support will come in handy.
Lastly, Moody’s estimated that metals prices would remain elevated due to low inventories. Aluminum, copper, zinc, and nickel prices are expected to stay higher for longer. And only by mid-2024, the agency sees global market conditions easing and more supply coming online, refilling low inventories. This will remove some pricing pressure on the metals.
The outlook for bulk metals like iron ore isn’t positive. Investors should take note.
High commodity prices will offset rising costs in the mining industry. Profitability should remain intact. This is why Moody’s sees the mining industry as “stable” despite the volatility shaking global markets.
Thank you for your loyal readership,
The Financial Star team