US indices kicked off the new month on a negative note. The S&P500 fell 0.75% and Nasdaq closed 0.72% lower, on Jamie Dimon’s ‘hurricane’ warnings, a stronger-than-expected ISM manufacturing PMI, and higher-than-expected job openings, that fueled the hawkish Federal Reserve (Fed) expectations.
The US 10-year yield bounced above the 2.90% mark, the dollar index gained, as gold tipped a toe below the 200-DMA, $1842 per ounce on the back of rising US yields.
Bitcoin, on the other hand, fell as fast as it rose earlier this week, as investors’ appetite for risk fell sharply over the past sessions.
And oh, Janet Yellen said she was ‘wrong’ about inflation, as the war in Ukraine was an unexpected event that sent the energy prices soaring and boosted inflation. BUT, inflation was soaring well before the war started. The US policymakers were simply so happy in a configuration where they could pump as much as money in the system without seeing any negative impacts for years that they only woke up when the reality hit the fan, and it was, simply, too late.
The thing is, the Fed started shrinking the size of its balance sheet yesterday, and the QT should technically lead to a further steepening of the curve. However, the yields react also, and perhaps more to the Fed expectations, and because the QT must have already been fully priced in, we may not see the concrete start of the QT send the US 10-year yield above the 3% mark. However, it is hard to tell accurately how the QT would impact markets, as this is the first time the Fed will let the size of its balance sheet drop significantly.
Jobs data won’t change the Fed’s plan
Today’s ADP report is important, but unless we have a decent surprise, it’s mostly unlikely to give a fresh direction to the market. The US economy is expected to have added 300’000 new private jobs, which is a strong number if we go back to the pre-pandemic times. A lower-than-expected figure will hardly revive the Fed doves, while a positive read could boost the Fed hawks – and further dampen the market mood.
Bye bye Russia?
Crude oil couldn’t extend gains above the $120pb, after Europeans broke the news that they would ban oil. That’s positive news, but it doesn’t solve the problem of higher oil prices.
In fact, the price of a barrel of WTI rallied more than 70% since last year, but the US production increased by a 7% only. One of the reasons for that is, oil prices are just too volatile since the beginning of the pandemic. We went from negative price for a barrel to historically high levels in a matter of months, and producers don’t necessarily want to overreact changing their long-term production plans. Even less so when there is so much pressure about shifting to green energy sources. So many producers simply prefer cashing in and enjoying the ride rather than using that cash for future investments.
Therefore, the structurally tighter supply, the OPEC’s reluctance to increase production in a way to ease the price pressure, and of course, the end of the lockdown in Shanghai and the prospects of Chinese opening will likely continue a throw a floor under the price pullbacks in oil prices. Though the upside seems limited around the $120pb for now.
Speaking of OPEC, OPEC will likely stick to its production increase plan and won’t make miracles at this week’s meeting, but the Wall Street Journal reported that they could suspend the OPEC+ deal with Russia earlier than set. Normally, the co-production regime should continue until the end of this year, but it is now possible that the deal ends by the end of September as the quota system doesn’t make sense when Russia is held back from increasing its production due to the fresh European sanctions. Good news is Saudi and United Arab Emirates might fill in the gap. Bad news is, Saudi and United Arab Emirates might not fully fill in the gap.
