Equities retreated, the US yields and the US dollar rebounded as more Federal Reserve (Fed) members threw hawkish comments to defend their fight against inflation.
Neel Kashkari, who used to be a dovish Fed member said that the Fed is ‘quite a ways away’ from pausing its rate hike cycle, while the US Treasury Secretary, and ex-Fed head Janet Yellen urged central banks to keep fighting inflation, though she mentioned the potential risks to the global economy.
The S&P500 closed 1% lower, while Nasdaq slid 0.68% despite being more sensitive to rate hikes. The US short-term yields rose, and the dollar index gained.
Gold bounced lower from the 50-DMA on the back of rising US yields, whereas the barrel of US crude drilled – though very slowly – above its own 50-DMA and is now above the summer down trending channel top.
Yet the rising oil prices fuel inflation and Fed expectations and certainly don’t do good to the overall market mood.
Shell warning didn’t prevent US oil stocks from rallying
Shell warned investors that the Q3 results won’t be as breathtaking as the Q2, as the weaker gas trading and weaker refining will be reflected in the latest quarter earnings. Shell dropped up to 5% yesterday and closed the session a bit less than a 3% loss. It pulled BP lower along with it, but BP managed to close flat.
Across the Atlantic, the oil stock investors didn’t want to hear anything. Exxon Mobil jumped 3%, while a Warren Buffet favourite Occidental Petroleum ticked 4% higher.
US jobs data ahead
The US will announce its latest jobs data in a tense and volatile environment of energy crisis, persistent inflation, Fed members insisting that what they are doing is right, and markets crying that what they are doing is maybe a bit too much.
Bloomberg highlights that the Fed officials have failed to predict how high the joblessness would rise during, or after, almost every recession over the past 50 years. They say that the unemployment as a result of tightening topped the Fed projections by 1 percentage point or more, three times. That’s not because the Fed is uncapable of making good projections, but their models are.
So, investors are not totally wrong betting that the Fed may have to slowdown, and even reverse policy, if they go too far. And this is why the jobs data is gaining importance, yet again.
If inflation is decisive for the direction the Fed will follow, employment data will determine the pace it will travel.
What would be a delicious jobs data cocktail?
Investors will be watching three main elements. The NFP data, the unemployment and participation rates, and the wages growth.
The most ideal mix would be a softer NFP data compared to previous months, but not too soft either. Because the softer data would mean that the US jobs market is cooling as the Fed wants, but a too soft data would mean that the economy may not be doing fine for a soft landing. A number around 200’000 should be ok to both satisfy the idee that the jobs market is cooling, but remains robust. Combined with the decline in job openings, that would mean that the Fed is getting a tighter employment market without however rocking the boat… just yet.
On the unemployment rate front, an uptick would be welcome due to an uptick in participation rate. That would mean that unemployment is higher not necessarily because people are losing their jobs, but rather because more people are willing to work.
And finally, a reasonable wages growth, like around 0.1-0.2% should be the cherry on top, as a too strong wages growth is a threat for inflation. Expectation for today is a NFP read of around 250K, unemployment rate at 3.7%, and wages growth of around 0.3% over the month.
A mix of soft data will likely see a bullish knee-jerk reaction, as investors are turning more concerned about the aggressive Fed tightening and are ready to bet that the rate hikes would slow down in the next few meetings and even stop, while a strong data could trigger a further selloff, as it would fail to keep the aggressive Fed hawks at bay.