As 2024 draws to a close, the copper market exhibits an intriguing narrative marked by fluctuating prices and underlying economic indicatorsOver the month of December, the Shanghai copper index experienced a subtle decline of 0.03% by December 31. Initially witnessing a rise fueled by positive trends in China’s manufacturing sector, reflected in an increase in the Purchasing Managers' Index (PMI) in November, copper prices reached a peak of 75,860 yuan per tonThis represented a gain of 1,660 yuan as compared to the start of DecemberHowever, the latter half of the month saw copper prices retract as global markets shifted their focus toward the U.SFederal Reserve's hawkish stance, precipitating a strengthening of the dollar and leading to a decline in copper values within the fluctuations observed in NovemberThe lowest point for the primary contract fell to 73,560 yuan per tonAs January approaches, challenges from overseas macroeconomic uncertainties loom larger, compounded by China's slowdown in copper consumption as it enters a seasonal lull before the traditional long holiday break.

The Federal Reserve's meeting on December 19 provided a significant jolt to market expectations when it cut interest rates by 25 basis points but simultaneously reduced its outlook for future cuts in 2025 from four to just two

The dot plot projected a rise in the central tendency for interest rates by 50 basis points to 3.9%. Chairman Jerome Powell signaled that the Fed is nearing a point where it may pause rate cuts, emphasizing that any such decisions would depend on fresh developments in inflationThis shift in focus illustrates the Federal Reserve’s reorientation, from stabilizing the labor market to balancing inflation with employment.

Compounding this scenario, American inflation expectations have surged again, prompting the Federal Reserve to adopt a more hawkish toneIn its recent assessment, the Fed adjusted its growth and inflation forecasts for the U.Seconomy upwards for both 2024 and 2025. The anticipated GDP growth rate for 2024 increased by 0.5 percentage points to 2.5%, and modest increments were noted for subsequent years as wellInflation forecasts received similar upward revisions, hinting that the central bank remains wary of persistent inflation and the potential for it to rebound aggressively.

Economic policies surrounding immigration and tariffs may be influencing inflation dynamics in the United States

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Census data indicates that the U.Spopulation clocked a growth of approximately 3.3 million in 2024, with immigrants accounting for around 85% of this numberThis influx contributes to the fastest population growth rate since 2001, helping alleviate labor shortages in various sectorsDespite job vacancies remaining relatively high—over 7.74 million as of October 2024—average hourly earnings growth has slowed, demonstrating a tempering effect on inflationary pressuresHowever, statements from the newly elected president regarding tightening immigration policies could once again exacerbate labor shortages, leaving added uncertainty surrounding the Fed’s interest rate paths.

In parallel, the road to a recovery in manufacturing sentiment across the U.Sand Europe has proven to be rockyReports from December revealed that while the U.Smanufacturing PMI hovered close to the threshold at 49.7, it slipped to 48.3 in December, below both prior values and expectations

The service sector, however, fared better, posting a PMI of 58.5—the highest in over two years, underscoring a bifurcated domestic economySimilarly, the Eurozone displayed a tepid manufacturing PMI of 45.2, signaling continued challenges in the manufacturing arena.

Investment sentiment also appears cautious amidst these dynamics, as speculative funds have withdrawn significantly from the copper marketBy the end of December, non-commercial net long positions in COMEX had diminished, with similar trends observed in the London Metal Exchange (LME). Historically, the movement of speculative funds closely aligns with manufacturing PMI trends, and the ongoing gloom in manufacturing sentiment continues to restrain risk tolerance.

Looking to January, significant changes in immigration and tariff policies are anticipatedThe initiation of measures aimed at immigrant deportations could catalyze wage increases in the service sector while further intensifying inflation, raising alarms about the risk of re-inflation in the U.S

economyAdditionally, increased tariffs on non-U.Seconomies could propel domestic product prices upward and invite counteractive currency devaluation from affected nations, adding to global economic uncertainty.

On the domestic front in China, copper consumption is poised to dip following the Lunar New Year holiday, traditionally marking a seasonal slowdown in demandHistory shows that copper inventories tend to accumulate during this period, with spot market premiums generally decliningFor instance, between January and February in prior years, the average premiums for grade 1 electrolytic copper noticeably dippedThis seasonal trend indicates limited driving forces for copper demand ahead of and after the holiday, suggesting that consumption-led price impacts will be minimal.

In the medium and long term, there remains a cautiously optimistic outlook for copper pricesThe proactive economic policies introduced by China are apt to kindle economic growth, stimulating demand for copper as momentum builds

Additionally, supply constraints are projected to bolster mid-term price movementsRecent agreements between major smelting firms and international entities underscore a diminishing processing fee for copper concentrates, projecting heightened tightness in supply as global demand growsEmerging economies, particularly in Southeast Asia, are poised to elevate their copper consumption driven by infrastructure investments.

In summary, as January unfolds, the copper market faces a myriad of uncertainties due to global macroeconomic factorsThe recent uptick in inflation projections from U.STreasury yields and ongoing manufacturing slowdowns in the U.Sand Eurozone suggest a careful approach is warrantedAs imminent immigration and policy changes loom on the horizon, potential effects on currency strength are equally unpredictableNonetheless, the medium to long-term view retains promise for copper, contingent upon China's sustained economic stimulus, supply limitations, and emerging market demands that provide a conducive backdrop for price elevation.