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Fed seeks evidence of cooling labour market

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By Craig Erlam  

Equity markets edged higher in the run up to the US jobs report on Friday, a release that could set the tone in the markets ahead of next month’s Fed meeting.

While price pressures are what the Fed is primarily interested in, there is a view on the FOMC that sustainable 2% inflation is not possible without cooling the labour market.

Time will tell how accurate an assumption that is, but in the interim, there will be enormous focus on jobs data for signs of cracks appearing that can offer the central bank the comfort it craves.

The ADP report on Wednesday indicated we could be looking at a weaker NFP, but let’s face it, it’s been a long time since anyone looked to ADP for a reliable insight into the jobs report. If we do see a repeat, it may help to ease some of the anxiety we’ve seen in the markets in recent weeks.

We’ve been flooded with higher-for-longer central bankers, determined to get every last drop out of their rate hikes.

While I’m still of the view that the plan at the Fed has always been and remains to pivot very late and maintain this hawkish rhetoric until then, investors are now less sure and are relying on the data to pull them back in.

Oil steadies after plunging

Oil prices appear to be steadying a little after plunging in the middle of this week. The market was already looking a little overbought and the most recent peak lacked momentum, which suggested the cracks were appearing. The sell-off though coincided with the OPEC+ meeting despite no changes being announced.

It seems it was the lack of an update that may have contributed to the move, with Saudi Arabia and Russia in particular opting not to commit to extending their voluntary cuts beyond the end of the year.

They may still do so, but clearly with oil at these levels and demand at risk of softening, markets are now positioning for those restrictions in particular expiring in a couple of months.

Gold steady

Gold appears to have stabilised ahead of the NFP report after plunging on the back of rising bond yields.

The question now is whether the report will put investors’ fears at ease, enabling a strong rebound in the yellow metal, or compound the slew of hawkish central bank commentary and hit it harder.

If we do see the latter, then $1,780-1,800 stands out as a major test of potential support having been a major region in the past, most recently in February and March. The levels that stand out above, if we do see a rebound, are $1,860, $1,880, and $1,900.

Bitcoin moving higher?

Bitcoin has been quietly drifting higher in recent weeks despite broader market sentiment weakening and there being little progress on the spot bitcoin ETF.

Perhaps there’s some optimism building ahead of its expected acceptance which could be a significant milestone in its journey.

It continues to see resistance around $28,000, a break of which could be a very bullish signal after almost two months of trading below here and multiple failures to break higher.

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.