How do commodities perform during a Fed rate-cutting cycle? JPMorgan: They usually enter an upward trend in the "fourth month."

How do commodities perform during a Fed rate-cutting cycle? JPMorgan: They usually enter an upward trend in the "fourth month."

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The Federal Reserve’s interest rate cut cycle has officially begun, bringing new opportunities and challenges to the commodity market.

According to ZF Trading Desk, a JPMorgan report published on September 18 indicates that Fed rate cuts are usually positive for commodities, with an average increase of 3% in the nine months following the first cut. Additionally, commodity prices tend to follow a specific rhythm after a rate cut: continuing to rise in the first month after the cut, then pulling back in the second and third months, and regaining upward momentum from the fourth month onward.

However, commodity performance during a rate cut cycle cannot be simply generalized, as it is influenced by multiple factors, with the macroeconomic backdrop being key. The bank cites historical data showing that during “benign” rate cut cycles with a resilient economy (such as 1995 and 2024), commodities achieved an average return of as high as 15%. In contrast, during “recessionary” rate cut cycles (such as 1998, 2001, and 2019), the average decline was 16%.

Data shows that energy and precious metals are the strongest performers in rate cut cycles, with average gains of 10% and 7% respectively nine months after the first rate cut; industrial metals lag, averaging a 4% decline.

History does not simply repeat itself but often rhymes. JPMorgan analyzed monthly returns during the past seven rate cut cycles and found a common price pattern.

Typically, driven by optimism, the rally in commodity prices begins one month before the rate cut and continues into the first month after the cut.

However, after the initial good news is digested, the market enters a “cooling-off period.” The report clearly warns investors to “beware of the second and third months.” Data shows that during these two months, commodities on average undergo a pullback, with the market appearing to digest the initial effects of the rate cut while waiting for new catalysts.

The true turning point arrives in the fourth month. From the fourth month onward, as the cumulative effect of rate cuts builds and macro prospects clarify further, commodities in general regain upward momentum.

“Benign” vs. “Recessionary” Rate Cuts: Vastly Different Returns

According to a review of the last seven Fed rate cut cycles, the macro background may matter more for commodities than the rate cut itself.

JPMorgan’s report notes that under an economic “soft landing” or “mid-cycle adjustment”—so-called “benign” rate cut cycles, such as in 1995 and 2024—commodities performed extremely well. In these cycles, the Bloomberg Commodity Index (BCOM) posted a remarkable average return of 15% in the nine months after the first rate cut, mainly driven by energy and precious metals.

However, when rate cuts are accompanied by recession risks, such as in 1998, 2001, and 2019, commodities face significant downward pressure. In these “recession-leaning” cycles, the BCOM index averaged a 16% decline over nine months. The report highlights that in this scenario, investor demand for safe havens will make gold a more favored asset.

Sector Divergence: Energy and Precious Metals Take the Lead

Not all commodities benefit equally during a rate cut cycle. Historical data shows that energy and precious metals are the two best-performing sectors.

  • Leaders: Energy and Precious Metals. The report shows that, in the nine months after the first rate cut, the BCOM Energy Index averaged a 10% gain and the BCOM Precious Metals Index averaged a 7% gain. Precious metals especially benefit from falling rates and safe-haven sentiment, recording positive returns in six out of the last seven rate cut cycles.
  • Laggards: Industrial Metals. Contrary to intuition, industrial metals perform the worst during rate cut cycles, averaging a 4% decline over nine months. The report notes that even in the “soft landing” cycle of 1995, industrial metals were the only major sector to post a loss.
  • Mediocre: Agriculture and Livestock. These two sectors show no clear pattern during rate cut cycles.

Three Major Scenarios for the Future: Opportunities and Risks Coexist

Looking ahead, JPMorgan economists outline three possible scenarios for the market:

  1. “Bronzilocks” Scenario: The global economy “shakes but does not derail,” with growth remaining resilient. In this environment, commodities are expected to achieve strong returns.
  2. Recession Scenario (Probability 40%): The report estimates that the risk of US recession remains as high as 40%. A worsening labor market and inflation eroding consumption may end the current expansion. In this scenario, commodities will face broad downward pressure, and investment strategies should shift toward gold.
  3. Reflation Scenario (Probability 45%): The report sees a 45% probability for the risk of persistent US inflation. The US will celebrate its 250th founding anniversary in 2026, with major events such as the 2026 FIFA World Cup and the 2028 Los Angeles Summer Olympics scheduled. In an environment of renewed inflation and rebounding manufacturing PMI, commodities’ average monthly return can reach 1.6%.

 

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