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Services PMIs point to broader weakness, OPEC+ not as unified

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By Craig Erlam  

A raft of weaker services surveys have weighed on sentiment in Europe at the start of the week, while Wall Street is more of a mixed bag.

Investors are still digesting Friday’s jobs report which didn’t settle the debate on whether the Fed should pause or not ahead of the meeting next week. There were positives and negatives in the report, but ultimately it comes down to the inflation data next week.

Monday’s services PMIs broadly disappointed despite remaining in a healthy position. The UK was among the minority to see a positive revision, while the numbers from the euro area saw some substantial declines, albeit while remaining well above the 50 level that separates growth from contraction.

The US ISM services PMI fell sharply to 50.3 against expectations of a small increase to 52.6, a sign that credit conditions and the drawdown of pandemic savings are finally hitting services activity.

Further evidence will be wanted by the Fed, but the trend has been declining and combined with other data, policymakers may now be hopeful that its aggressive tightening cycle is having an impact.

Oil pares gains

The Saudis got their output cut after intense negotiations over the weekend; the only downside being that no one else opted to be a part of it until the start of 2024.

It became clear last week that Saudi Arabia was going to be pushing for a cut at the weekend meeting and that getting others on board may prove difficult. As it turns out, the compromise that was struck in the spirit of unity and cooperation looks far from convincing.

The deal appears to comprise three components: technical tweaks that make little difference to actual output, a Saudi cut of one million barrels per day, and an unusual commitment to reduce production seven months down the line. In other words, it’s a unilateral move from Saudi Arabia dressed up as an OPEC+ cut.

Which begs the question, how unified is the alliance at this point, with Saudi Arabia seemingly more price obsessed than others?

On Monday, its energy minister reportedly claimed to be “fed up” with other members not meeting output goals when speaking to Al Arabiya in another sign of some division within the group.

Markets may see this as a sign of weakness within OPEC+ and a lack of willingness to restrict supply further which could potentially see the price come under pressure. Crude was a little higher Monday, but gave back the bulk of the gains from earlier in the session and is still below the range it traded in prior to the SVB crisis.

Gold recovers after NFP hit

Gold is recovering at the start of the week after suffering in the aftermath of Friday’s US jobs report. The headline NFP number was a big blow and clearly, one that was difficult to shrug off.

There were other aspects of the report that were more promising from the rise in the unemployment rate to the slight dip in annual earnings and higher-than-expected participation. Even so, such strong job creation is tough to ignore.

As Monday’s rebound highlights, the key takeaway from the jobs report is that we’re none-the-wiser.

There was something there for everyone and the Fed won’t feel better informed on the state of the labour market in the aftermath of the report.

While markets are pricing in a slightly greater chance of a pause than another hike, this fact works more in favour of the hawks than the doves, as we’re yet to see signs of any significant progress.

So much now hangs on the inflation report the day before the Fed meets.

If the Fed is to pause, we need to see something promising in that report or it may be easier for policymakers to hike once more and hope for better data over the following few months. This uncertainty could lead to a lot of volatility in gold in the short term.

Range-bound trade continues in bitcoin

Bitcoin was almost 2% lower on Monday after edging higher over the weekend.

The price initially dipped following the jobs report on Friday, but quickly recovered and is now trading not far from where it was before the release.

It remains range-bound between $26,000 and $28,000 where it has traded over the last month and is showing little sign of breaking out in either direction.

 

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.