Goldilocks Appears on Good Friday
We started last week with the reaction to OPEC+ announcing a cut in oil production and its subsequent rise in price and ended it with more robust than expected employment data from the US. The financial markets seemed to be unmoved by the potential impact on inflation by the jump in oil prices, which is almost assuming that OPEC+ won’t cut production more in the coming months, which in our opinion, is a mistake. The relationship between Iran, Saudi Arabia and Russia in OPEC+ does nothing if not throw out warning signs to the West and America in particular. With a weakened US and the present geopolitical background, it would be no surprise if oil production was cut further and the price of oil headed back towards $100 a barrel. Indeed, President Biden’s snub of the Saudi’s offer to help him replenish the Strategic Petroleum Reserve may come back to haunt him and Jay Powell in particular as they seek to push inflation down.
In many ways, it was a strange week as the markets searched for direction, with the dollar often the brunt of selling ahead of the long Easter weekend. With US employment data scheduled for last Friday whilst most of the world was organising Easter Egg hunts, it is understandable that the market was directionless during the week. It is certainly fair to say that the market was expecting a disappointment from the Non-Farm Payrolls numbers after eleven straight months of them beating the consensus, the first time that this has happened since 1987. Certainly, JOLTS, the job openings data, was slightly easier but let us not forget that there are still 10 million openings whilst the number seeking work is way below that. The actual Non-Farm Payroll numbers yet again beat the estimates and, in doing so, surprised the markets. Indeed, they really were a “Goldilocks” report with an increase of 236,000 in the headline number, on target wage growth and the headline unemployment number edging down.
With unemployment still hovering around 3.5%, there was nothing in last week’s data to justify the confidence that the markets have had that the Fed is done with hiking and that their next move is down. In fairness, after the employment data, the derivatives market increased the probability of the Fed hiking by 25bp, which is now a better than evens chance. Yet even so, markets are still expecting this to be the last move upwards before the Fed cuts and consequently have the propensity to sell the dollar. Have we have said before, we believe that the markets are premature in anticipating the Fed pivot, and we still prefer to follow Jay Powell’s mantra of higher for longer.
With yesterday a holiday for many, we get back to work today for what should be another volatile week. The key data for the week is tomorrow’s US Consumer Price Index, which is expected to show a 0.4% monthly rise, easing but still double the Fed’s target. Unless there is a major shock in the figures, they will further cement interest rates rising further in May. This should lead to a stronger dollar; however, with the present mindset of the markets, this is in no way inevitable. There is, of course, the worry of financial stress in the banking sector, which is made worse by every uptick in interest rates, so we will be keeping a wary eye on the rumour mill. The other talking point in the US this week will be the release on Wednesday of the FOMC minutes from last month’s meeting, which will give us some insight into how the Fed was thinking then. Closer to home, the eurozone has some important data to watch out for, including Industrial Production and Retail Sales, which should confirm that the ECB will raise rates again at their next meeting. Also released on Thursday will be German Consumer Prices always a sensitive number. Finally, we have been particularly quiet about the UK, and it seems that not only is much of the country on holiday the statisticians who deliver the data are as well, with only an estimate for February’s GDP, Industrial and Manufacturing Production due on Thursday.