By Craig Erlam
There’s been a lot of talk this week whether investors have become too optimistic about interest rate cuts next year and Friday’s jobs report may have brought some crashing back down to earth.
It’s not a terrible report by any stretch of the imagination. But it may well convince the Federal Reserve that it must proceed cautiously when it meets next.
Which makes the 4-5 rate cuts starting in March that markets had priced in a little harder to justify as it doesn’t allow much of a turnaround, even accounting for the late pivot that was expected from the Fed.
Despite the setback, markets are still pricing in a rate cut by May and four in total next year, so it isn’t that much of a setback. The NFP jobs report just wasn’t ideal and didn’t really fit the narrative that had been building in the markets, some would say too much.
Jobs growth was a little stronger, while unemployment unexpectedly fell by 0.2% to 3.7% which came as a shock.
The US added 199,000 jobs in June, slightly above the forecasted figure of 180,000.
But it was the wages component that was most disappointing after a few very promising reports. It was never likely to be plain sailing when it comes to wages, but Friday was definitely a small setback.
Ultimately, the dot plot next week will tell us where the central bank sees interest rates over the coming years, but it won’t tell us when the easing cycle will begin, and for that, the forecasts and commentary will be helpful.
We’re now in a position where a disappointing November inflation report could see the Fed maintain its “prepared to hike if necessary” narrative, putting a March cut in serious doubt.
Oil brings six days of losses to end
Oil’s losing streak appears to be coming to an end after six sessions in the red and around 13% lost from peak to trough.
It’s up close to 3% on Friday, but still below the November lows, highlighting how unimpressed traders were with the OPEC+ “deal”. It also suggests they aren’t particularly optimistic about the global economy next year.
Gold tests $2,000
Gold is down more than 1% after the disappointing US jobs report and threatening to break back below $2,000 in the same week it started by soaring to record highs.
It really has been quite the week for the yellow metal and with US inflation and the Fed interest rate decision to come next week, the volatility may not be going anywhere.
Bitcoin initially appeared to respond to the US jobs figures, but it didn’t last very long as while other assets held onto at least a portion of their moves, BTC pulled back slightly before jumping to new highs for the day above $44,000.
Further evidence that while interest rates do influence crypto, it’s very much a supportive factor.
ETF excitement is clearly the driving force, it’s just a question of how far it can go.
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.