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Sour Mood Ahead of US Jobs Data

Risk appetite got a hit yesterday as an army of Federal Reserve (Fed) speakers sounded cautious about the timing of the first rate cut and as the barrel of Brent spiked past the $90pb level on rising tensions between Iran and Israel after Israel bombed the Iranian embassy in Damascus earlier this week. The barrel of US crude spiked to $87.50pb. So far, tensions in the Middle East didn’t impact oil supply significantly. As a result, we saw a sustainable rise in oil prices – not a spike. But Iran’s direct involvement could mark a new milestone in the Middle East conflict and could back a rapid rise in oil prices in the near term. In this context, we can’t rule out the risk of a short-term rally in oil prices to $95/100pb range.

The rate cut debate heats up

The latest spike in oil prices will be reflected in the upcoming inflation reads and may derail the Fed from its ‘three rate cuts’ plan for this year. Indeed, when we listen to the Fed speakers, we sense that there is an increasing caution regarding that expectation. Neel Kashkari for example, who used to be a dovish voice, said yesterday that the January and February inflation readings were ‘a little bit concerning’ and that the Fed may not cut rates at all this year. Happily, he doesn’t vote this year. But earlier this week, Raphael Bostic said that he expects just one cut this year – after the election, and Patrick Harker and Thomas Barkin also backed the idea of a patient approach from the Fed as the uptick in inflation and the rising oil prices don’t necessarily point at further easing in inflation toward the Fed’s 2% target.

Sour mood into US jobs data

The combination of cautious Fed remarks and oil rally spoiled the market mood ahead of today’s US jobs data. The S&P500 fell more than 1%, as Nasdaq 100 retreated 1.55%. The US yields however remained soft on the back of a flight to safety, and the US dollar rebounded in Asia after hitting a two-week low.

Today, all eyes are on the US jobs data, that should distinguish between those expecting that the Fed will cut interest rates three times this year and those who bet that the Fed will barely cut the rates with strong growth and rising inflation. The US economy is expected to have added 212’000 new nonfarm jobs last month, the average earnings may have accelerated on a monthly basis and decelerated on a yearly basis. The unemployment is seen steady at 3.9%. Note that the mention of job cuts in earnings call have been rising since the beginning of the year, yet we haven’t yet seen a material impact on official data. In fact, the past three NFP numbers exceeded market expectations by around 78’000 and the US economy added around 280’000 new nonfarm jobs on average over the past three months. Another higher-than-expected NFP and hotter-than-expected wages growth could lead to a further pullback in dovish Fed expectations, weigh on stock and bond valuations and boost the US dollar. The sweetest combination would be a reasonably strong NFP number and softer wages growth. The latter would cement the expectation of a soft landing and give support to equities.

Diverging Europe

The minutes from the latest European Central Bank (ECB) meeting showed that the Eurozone officials have a clearer opinion on the timing of the first rate hike: a June cut looks like a done deal even though ECB Chief Christine Lagarde warned that the ECB is not willing to commit to further cuts beyond June.

In Switzerland, a further fall in inflation to just 1% on a yearly basis in March (and 0% on a monthly basis) hints that the Swiss National Bank (SNB) is in position to opt for more rate cuts this year to take advantage of a period where they could loosen the franc and boost the Swiss economy – especially for Swiss exporters that have suffered the consequences of a too-strong Swiss franc during the SNB’s fight against inflation. And franc has room to soften, the USDCHF has not yet reached the 38.2% Fibonacci retracement on 2022-2023 selloff, while the EURCHF recovered just a third of the post-pandemic appreciation. Carry traders – which borrow low-yielding currencies to invest in higher yielding ones – are gently leaving the yen – where the Bank of Japan’s (BoJ) next move could only be a hawkish move – and turning to Swiss francs for funding their carry trades. And the latter should help the Swiss franc give back strength, at least until the other central banks decide that it’s time for them to act, as well.

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