By Craig Erlam
Stock markets are tentatively higher at the end of the week, but how they ultimately see it out will depend on the US jobs report.
While the US banking system has probably been the main talking point this week, the two headline events were always the Federal Reserve on Wednesday and Friday’s jobs report and that hasn’t changed.
Cracks have been appearing in the economy recently, but not to the extent that it appears inflation is likely to sustainably return to target. Having gone data-dependent, the Fed is now relying on the numbers to get them off the hook in June and the NFP jobs data could be a giant leap towards that.
We expect to see a big shift in the performance of the labour market starting in April, with much lower levels of jobs growth, more jobless claims and higher unemployment.
That will create the slack in the labour market that the Fed has been pushing for in order for wage growth to moderate further, while avoiding a recession, something that has been complicated by the fallout in the regional banks.
Markets are now positioned for those cracks to deepen which will enable the Fed to pause and, while it won’t say so at this point, start cutting rates late in Summer or early Autumn. Another surprisingly strong jobs report would be a huge blow and could see a shift in expectations for the next meeting, with another hike currently priced out.
This is one of two jobs reports before then which, combined with all of the other data in that time, should still provide the Fed plenty of evidence that substantial progress has been made.
But it wouldn’t be a good start and anxiety could be heightened if the economy shows immense resilience once more.
A wild week for oil
It’s not just some regional US banks that have experienced a run recently; oil traders have been at it too.
The sell-off in March was triggered by the SVB collapse and everything that followed, and it was only when OPEC+ stepped in that the price recovered.
And now it seems that not only was the decision to cut output by 1 million barrels per day not the catalyst for $100 oil, but it also may not have actually been enough to rebalance market expectations.
Clearly, traders are concerned about the knock-on effects of banking turmoil on the broader economy and therefore demand, and the oil cartel may be questioning whether further action is needed.
The surprise cut hasn’t proven to be much of a deterrent for sellers, although it may have contributed to the price rebounding around the March lows. It would appear volatility is here to stay and traders may be wary about another surprise intervention, although the next meeting is now a month away.
Could US jobs report propel gold?
Gold has been flirting with record highs this week and a favourable NFP jobs report could be the catalyst for a clear break. A weak report could see yields slip on the expectation that rate cuts could come sooner, weighing on the dollar and propelling the yellow metal higher.
That said, a lot is now priced-in and recent rallies have come on waning momentum which may suggest traders have adopted a profit-taking mentality, perhaps even leading to a corrective move.
Of course, that momentum may move back in the bulls’ favour if the report is weak enough and new highs backed by that could be a very bullish signal.
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.