By Craig Erlam
It’s been a mixed day of trade in Europe and the US opened marginally lower Thursday, as traders took a step back following a lively start to the year.
The Fed minutes may have put a slight dampener on things, although I’m not entirely sure.
The narrative from the U.S. central bank is very much in line with what we should expect. Policymakers are desperately trying to convince markets how serious they are about defeating inflation, to the point that investors are seemingly paying less attention.
I can understand the Fed’s caution given the erratic nature of the data and its own credibility issue having turned up casually late to the party.
The risk now is that it overcompensates during the exit from tightening and pushes the economy into a deeper downturn than necessary. This is why we may well see it maintain the hawkish position in the near term, but ultimately not follow through and instead quickly pivot, perhaps later in the quarter.
That will all depend on the data and the jobs report last month was not what the central bank wanted to see. It will be hoping for something more modest, with a particular focus falling on wages which surprised substantially to the upside in November.
The ADP report wasn’t a promising precursor, but then, it’s rarely a reliable one either.
Amazon and Salesforce continue layoffs
Tech firms have often been the outlier in markets in recent years and now they are for all the wrong reasons. While most companies have been reluctant to lay off staff having been burned in the aftermath of the pandemic by a surprisingly tight labour market, tech firms have been quick to pull the trigger and in emphatic fashion.
There is no crystal ball that the firms’ bosses have access to that others have not, rather it’s a reflection of the intense hiring spree they went on in recent years as business boomed and stock prices soared.
The economic cycle has turned rapidly leaving those companies over-staffed and while that would ideally not result in mass lay-offs, it was always likely to.
While other sectors may also gradually start laying off staff in response to the economic downturn, I don’t expect it will be on the same scale, not unless the outlook worsens considerably.
Oil’s rough couple of days
Oil is slightly higher on Thursday, paring losses from the last couple of days. Prices fell almost 10% over the last couple of days as China’s efforts to rapidly transition away from its zero-Covid campaign led to a powerful surge in cases, threatening to disrupt activity in the opening months of the year.
While most would agree that the move should lead to higher, more sustainable growth later in the year, the near-term outlook is clouded by the transition.
With oil now dipping back to levels at which the US has hinted it will be a buyer in order to refill the SPR, it will be interesting to see whether support arrives or WTI is able to slip below $70.
Gold paring gains
Gold gave back some of its new year gains on Thursday, with traders no doubt having one eye on this week’s jobs report. The Fed minutes contained no surprises, with policymakers keen to stress their commitment to raising rates and driving down inflation.
Whether they’ll follow through is another thing and there is a growing divide between what the Fed is saying and what markets are pricing, which in part explains why the central bank continues to be so forceful.
It doesn’t want to contribute to a loosening of financial conditions, even at the expense of its communication effectiveness, it seems.
The decline we’ve seen in yields in recent days highlights this and has been supportive for gold. Another strong jobs report may quickly put an end to that.
Pre-data nerves for bitcoin?
Bitcoin didn’t offer much in terms of excitement, down marginally and with a relatively tight trading range.
Whether that’s a little pre-jobs report apprehension or something more defensive amid a welcome quiet period for crypto isn’t clear, but we’ll find out soon enough.
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.