By Craig Erlam
It’s been another fascinating week in financial markets and it’s not over yet, with the US jobs report still to come amid some interest rate uncertainty.
The Fed meeting on Wednesday left investors scratching their heads. What was meant to be the pivot moment quickly became something very different; an admission that markets need to price in more.
The central bank had given with one hand and taken with the other and investors were left to sulk once more.
Perhaps the takeaway is more positive than the markets would have us believe.
In scaling back its tightening (probably) in December, the U.S. central bank is buying itself time for the data to improve and justify a lower terminal rate. It’s possible that the fear at the Federal Reserve was that a slower pace – or “dovish pivot” would send the wrong message and markets would overreact, undermining its tightening efforts. By adding the terminal rate caveat, it’s kept markets on their toes and bought the Fed more time.
The fact remains that the pace of tightening will be slower and the Fed will continue making monetary policy restrictive, but in a potentially less damaging way, while enabling more visibility on the economy. This puts additional emphasis on the data which could lower the terminal rate and further slow the pace of tightening.
While all of the data will be closely monitored and factored into the Fed’s decision-making in December, the two releases at the top of the list are the inflation and jobs reports. And we’ll get two of each, the first being the October jobs report, later Friday.
Needless to say, investors are a little on edge ahead of the release. Not only was Jerome Powell’s caveat unexpected and unwelcome by investors, the labour market remains extremely healthy which means the NFP report is likely to be red hot once more. If that doesn’t turn out to be the case, investors may start to see the upside to the Fed’s statements on Wednesday.
China rumours boost oil prices
Oil prices are rallying once more at the end of the week as rumours continue around China’s plans to relax certain Covid restrictions in the first major move away from its zero-Covid policy.
Of course, this is pure speculation and Thursday’s denial from the National Health Commission appears to have fallen on deaf ears, but that doesn’t appear to have stopped oil rallying. Stocks in China and Hong Kong aren’t doing too badly either.
There remain two dominant forces in the oil market right now, the economic outlook and OPEC+. We’ve seen more gloomy forecasts this week, with the BoE suggesting the UK could face a two-year recession.
While others may not be as bad, global growth prospects remain weak. Oil has been climbing over the last few weeks, but ultimately remains in the middle of the $90-100 range.
Gold tentatively higher
Gold is trading tentatively higher on the final day of the week after testing the September and October lows on Thursday.
The yellow metal was dealt another blow by the Fed’s admission on the terminal rate, but appears to be clinging on for now. A hot jobs report on Friday could be the final nail in the coffin, with support around $1,620 coming under serious pressure. Below there, $1,600 could be key.
But the gains we’re seeing so far are impressive, if not a little surprising. Following Wednesday’s setback, a rally of more than 1% in the run-up to what could be another red-hot jobs report is certainly bold. Should it break $1,680 in the aftermath, it could signal that a relief rally is underway.
BTC optimism ahead of jobs report
Bitcoin is bouncing back ahead of the jobs report alongside other risk assets. Whether it will be able to hold onto those gains will depend on the strength of the report itself, especially in light of the recent Fed comments.
Clearly, there’s some sense of optimism out there and bitcoin could be eyeing up $21,000 once more where it ran into resistance in late October. Of course, a failure to hold onto these gains could see $20,000 come under pressure once more.
Craig Erlam is Senior Market Analyst, UK & EMEA 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.