The excellent combo of lower-than-expected US NFP, weaker-than-expected wages growth and the unemployment rate at an almost two-year high sent another wave of optimism to the financial markets on Friday that the Federal Reserve (Fed) is done hiking the interest rates. Plus, a combined 100’000 downside revision to August and September numbers came as an indication that the job creation in the late summer wasn’t as strong as it was previously revealed. All the key metrics now suggest that the US jobs market is cooling, and that the Fed’s aggressive tightening campaign is finally giving the expected, loosening result. That should help keep inflation on track for further easing to the Fed’s 2% policy goal. And with a little bit of chance, without pushing the US economy into recession.
As such, the Fed is now expected to start cutting rates by June and cut by 100bp before next year ends. Combined with an early optimism that the US Treasury will borrow less than previously thought this quarter, the US bond market is on fire. The US 2-year yield fell to 4.85% last Friday, the 10-year yield shortly fell below 4.50%, and the 30-year bond dipped below 4.70%.
All this is great, but if the bond markets decide to go faster than the music, the US financial conditions would be relaxed too fast too soon, and the latter would bring the Fed back to a hawkish stance. Therefore, the rally in US bonds market should gently slow down into this week.
The US equities roared after three months of struggle. The S&P500 jumped almost 6% last week and recorded its best week since the beginning of the year. The VIX index plunged below the 15 mark and the US dollar slid the most since July and sank below its 50-DMA, triggering a beautiful rally in major pairs. The EURUSD flirted with 1.0750 even though the European economies are stagnating, and inflation fell to a 2-year low – giving the European Central Bank (ECB) doves plenty of reason to remain confident about the end of the hiking cycle in the Eurozone. Cable rallied to 1.2390, even though the Bank of England (BoE) projections, released a day before the US jobs data, weren’t painting a sunny picture for the British economy. The USDJPY fell below the 150 mark, as the US jobs data came to the rescue of the desperate Japanese yen, which got severely hit by yet another dovish policy announcement from the Bank of Japan (BoJ) two weeks ago, and the AUDUSD jumped to its 100-DMA and could extend rally if, as expected, the Reserve Bank of Australia (RBA) delivers a 25-bp hike tomorrow for the first time in 5 months, and say that the rates will remain high for a year to bring inflation to target, which may not happen easily given the ongoing strength of the economy and ultra-low unemployment.
What’s up with Oil?
In summary, bonds are up, yields are down, equities are up, the US dollar is down, and the major currencies are up as a result of a broad-based rally in the US bonds market. But interestingly, there is one kid in that party room that’s less cheery than the others and that’s crude oil. Normally, you would’ve expected the dovish Fed expectations, the lower dollar, and a global risk rally to boost sentiment in oil. Yet crude oil remained under pressure on Friday and tested the $80pb to the downside. Rising tensions in Gaza, the news that Israel encircled Gaza city and the headlines that Saudi and Russia will stick to their planned oil cuts despite the Middle East tensions haven’t done much to bring the oil bulls back to the market this Monday.
Yet, Saudi and Russia reiterated this weekend that they will keep their production curbs in place until the end of the year. Saudi will continue to pump 1-mio barrels less per day and Moscow will export 300’000 barrels less per day. The IEA still believes that a broader conflict in the Middle East could bring Saudi to revise its production plans, but economists at Bloomberg now say that Saudi may need oil prices to rise to $100pb to fund expensive projects including the futuristic city of Neom and finance the purchase of high-profile footballers and golfers. If that means that the world must suffer a deeper energy crisis, high inflation and poverty, be it! But even though the Saudis will put all their weight to keep oil prices above the $80pbnand rising (and saying that they will extend production curbs into next year should be enough to get the bears to their knees), the morose economic outlook and weak manufacturing data across the globe will likely limit gains before we get close to that well-wished $100pb level.