China: Slowed by the Federal Reserve's interest rate hike and expectations of domestic economic recovery, Copper prices have skyrocketed in recent weeks. The benchmark Shanghai Copper has climbed to reach 70,000 yuan/ton, while Lun Copper breached 9,000 US dollars/ton.

However, as the Spring Festival looms near, domestic Copper processing and distribution companies are gradually taking their vacation leave, creating a lack of spot demand and fundamental underpinning for the current uptrend. We should remain cautious concerning high Copper prices when considering the Federal Reserve’s interest rate meeting after the holiday.

As epidemic prevention measures saw optimization and adjustments, the peak of the first wave has abated; major cities' congestion delay index is increasing; traffic and travel are picking up; and people are venturing out more than ever before.

In addition, national and regional governments have been releasing increasingly supportive policies which infuse optimism for consumption recovery and real estate stabilization. The actual economic data may not be strong yet; however, this unshakable hope for an uptick in demand cannot be denied - a factor which helps explain Copper's rising price tag.

In the US, there is an expectation of a soft landing and a slowing down in interest rate hikes. Data from December 2022 show that 223,000 new non-farm workers were added, beyond the expected 203,000; while hourly wages experienced a 0.3% month-on-month and 4.6% year-on-year decrease - both lower than previous values recorded.

Meanwhile, November's data structure showed 1.74 job vacancies for each unemployed worker, remaining unchanged from the previous month. This indicates that job vacancies are providing some buffer to the unemployment rate even with employment loosening, without sparking a sharp rise in unemployment.

Lower wages also reduce inflation which subsequently leads to expectations of economic soft landing. The US CPI was also down by 0.1%, coming in as scheduled and recording its first negative value since May 2020. As inflation declined, it helped support the slowdown in interest rate hikes and lead to a weaker US dollar - boosting Copper prices in turn.

Short-term domestic and foreign policies have helped stimulate risk appetite but there remain hidden dangers lurking beneath all this optimism. Core CPI figures for the United States rose by 0.3%, higher than the previous 0.2%; of which the housing factor accounted for more than 30% of US CPI and 7.5% year-on-year increase for housing sub-items - thus becoming the main drag on performance.

On another note, long and short terms yields of US bonds continue to invert while overseas recession risks still exist therefore one cannot be too optimistic when looking at these numbers moving forward. We should keep an eye out for any signs of weakening due to overfull expectations; as such it is not recommended to aggressively pursue higher prices at this time either.

As the Spring Festival approaches, domestic processing enterprises have seen their operating rates decline and downstream terminals have gone on holiday in succession. The weekly operating rate of refined Copper rods has dropped to 49% from mid-December 2022, and the price difference between pure Copper and scrap Copper has grown rapidly to 2,400 yuan/ton - not a good sign for pure Copper consumption. Transactions in the spot market remain sluggish, with premiums being transferred into discounts.

Examining the last three years of domestic Copper social inventory during the Spring Festival period, it is estimated that this year's two weeks prior to the festival will see an increase of more than 30,000 tons in inventory - exceeding 10,000 tons (2022) and 12,000 tons (2021).

This signals a sharp incline in accumulation speed and a higher absolute value than in previous years - suggesting that this round of rise lacks fundamental resonance. As such, demand expectations post-holiday must be awaited as attention is given to how prices are accepted at lower reaches and changes to the domestic epidemic situation.

Despite the overall market outlook of a slowdown in US monetary policy and weaker domestic recovery, Copper demand in 2023 is still something to look forward to. Power consumption makes up 46% of China's Copper consumption structure, covering everything from wind power and photovoltaic power generation equipment to power transformation and distribution systems. The State Grid has announced record-high investments of over 520 billion yuan this year, which will drive up Copper usage.

Additionally, with traditional consumption expected to be flat due to post-cyclical attributes of real estate and emerging areas being the main source for increased Copper consumption, global Copper use related to wind energy, photovoltaics, and new energy vehicles is forecasted to increase from 10% last year to 12%. Differing opinions on both the extent of overseas recession and the pace of domestic/international policies remain.

The first quarter of the year is a mix of strong expectations and weak reality. After the Spring Festival, low inventory replenishment could act as a base for Copper prices to build upon. Signs of overseas recession are expected to deepen come mid-year with potential for recession trades to start and risky assets put under pressure. On the other hand, both supply and demand in the second half of the year should be bullish, with a possible recovery of the domestic economy.

Speculation of the Fed's potential interest rate cut in Q4 could see Copper prices stage a comeback - though this is just an educated guess from analyzing current conditions. The futures market comes with its own set of uncertainties and volatile trading logic which means we'll have to wait and see.