At 2 a.m. Beijing time on September 19, the US Federal Reserve (US Fed) announced a reduction in the federal funds rate target range to 4.75%-5%, marking the first rate cut since 2020. This rate cut signifies the end of the Fed's rate hike cycle since the pandemic and the beginning of a new rate cut path. However, this rare initial 50BP cut has left investors worried. What impact will this rate cut have on copper prices? The following is a detailed analysis.
Historically, since the 1980s, the Fed has only cut rates by 50BP twice. The first instance was in 2001 during the collapse of the internet bubble, which led to a nonlinear weakening in consumer retail and a recession in the US economy. The Fed cumulatively cut rates by 550BP from January 2001 to June 2003. The second instance was during the subprime mortgage crisis in 2007, which caused a recession as US stocks shrank. The Fed cumulatively cut rates by 525BP from September 2007 to December 2008. Looking at the situation in 2024, the financial market generally holds concerns about a US economic recession. Although AI technology stocks, represented by the "Big Seven" tech giants, have shown resilience, the following points indicate that the market is trading on US recession expectations: 1. Spot gold prices have been surging since the beginning of 2024, reaching near $2,600/oz before yesterday's rate cut, setting a historical high. 2. The US national debt has accelerated due to high interest rates, reaching $35 trillion for the first time in August 2024. This has weakened the correlation between some assets and the US dollar index in H1. Meanwhile, the yield on one-year and ten-year US Treasuries have been inverted, indicating pessimism about the long-term economic outlook. 3. After the excess savings accumulated during the US pandemic were depleted, employment and consumption data showed a significant cooling. Non-farm payrolls data and CPI have been declining since 2024, with a substantial downward revision in August's non-farm payrolls data. With the current household savings rate below the historical average, the risk of a soft landing for the US economy may increase.
Turning to the copper market, after the US inflation data was released in August, the Fed's rate cut became almost certain, easing market sentiment and lifting copper prices. However, after the rate cut in September, market risk aversion and macroeconomic recession expectations may pressure the copper market in the short term. In the long term, on the fundamentals side, the shortage of copper concentrate is unlikely to improve significantly. Considering the release of new smelting capacity and its demand for copper ore, the supply side may become increasingly tight until 2028. New energy consumption is expected to maintain a good growth rate, continuing to support copper prices at high levels. Under the baseline scenario, with a soft landing for the US economy and a gradual recovery of the domestic economy under policy support, the annual supply-demand gap at copper mines (234,000 mt in metal content) will widen. As liquidity eases and market confidence strengthens, the macroeconomy is expected to resonate with fundamentals in 2025, initiating another upward trend.
