By Edward Moya
Robust hiring in the U.S. in May pretty much guarantees the Federal Reserve will move forward with a couple of half-point rate hikes at the next two meetings.
US stocks edged lower Friday as the latest employment report showed slower job growth and potentially softening inflation, but still keeps the door open for the Fed to continue with its rate hiking campaign well beyond the summer.
Softer hiring and cooler wage data suggest that economic growth moderation is happening, but not fast enough to signal a change in course by the Fed. The consumer might be losing the battle with inflation, but spending won’t be weakening so quickly.
Stocks may struggle as the Fed needs to get rates closer to neutral before what seems to be a likely winter slowdown.
The May non-farm payroll (NFP) report showed that job growth is decelerating and wage pressures appear to be easing. A steady decline in job growth and a cooling of wage pressures should justify the Fed’s course of a couple rate hikes at both the June and July FOMC policy meetings.
If Jamie Dimon and Elon Musk are correct with their gloomy outlooks for the economy and the job/inflation data decelerates more quickly, the Fed could pivot at Jackson Hole and signal they may need to change course in September.
The US economy added 390,000 jobs in May, much better than the 320,000 consensus estimate, but still down from the upwardly revised 436,000 jobs created in April. The unemployment rate remained at 6.2% as the participation rate ticked higher.
Average hourly earnings from a year ago declined from 5.5% to 5.2%, as expected, which is welcome news for the Fed. Wage pressures might be easing and if that continues to decline, we could see the Fed quickly end its hiking campaign once rates reach their neutral rate.
Musk’s super bad feeling
Tesla CEO Elon Musk reportedly told executives he has a ‘super bad feeling’ about the economy and that Tesla may need to cut staff by about 10%.
Wall Street is not used to hearing from CEOs that are straight shooters, so Musk’s warning carries a lot of weight. Pausing hiring worldwide was somewhat expected, but eyeing a cut of 10% of staff, which is around 10,000 employees, suggests Tesla will struggle to meet its end of year targets.
Commodity prices are not easing fast enough, China’s COVID situation will likely linger, and a weaker consumer will hurt demand for new cars.
If Tesla is worried about its outlook, that means the other large car manufacturers are in bigger trouble. Tesla could be vulnerable to a retest of the May lows, but that will likely be a buying opportunity. Tesla will still remain a buy for many on Wall Street as it is still the EV king, energy prices are not coming down anytime soon, and a stock-split is likely coming for retail traders.
Oil’s strong week
Crude prices are consolidating after an OPEC+ hangover and a robust NFP report that suggests the consumer is still in decent shape.
Oil will be a very choppy trade given that bullish exhaustion could be settling in following the modest output boost by OPEC+ will still keep the oil market tight, a strong summer driving/travel season is here, growing optimism for the demand outlook with China’s reopening, and as some traders are expecting that President Biden’s trip later this month to Saudi Arabia could lead to some relief for oil prices.
This oil market will remain tight throughout the summer, so there should be further upside for oil prices. Unless Biden’s trip leads to a breakthrough of more output by the Saudis, oil will head higher as we don’t see any significant signs of crude demand destruction.
Gold eases
Gold prices edged lower after a robust NFP report sent the dollar higher. Traders expected to see a stronger deceleration with job growth that could possibly make the Fed pivot away from a half-point rate hike in September (June and July are now widely expected to be 50bps hikes each).
The economy is not softening quickly and that took away the need for safe-havens on Friday.
Growing doom and gloom calls, however, should keep the precious metal supported over the short-term.
Bitcoin below $30,000
Bitcoin remains anchored and is following the move lower in equities.
Fed rate hike expectations need to come down for Bitcoin to stabilise further and Friday’s job’s report did not help.
Edward Moya is Senior Market Analyst, the Americas, at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
