Treading Water

Markets are treading water ahead of the release of the first jobs report of the new year, with investors very aware of just how important this could be after last month’s setback.

The November report contained everything the Federal Reserve did not want to see. Strong jobs growth – with upward revisions to prior releases – much higher wages than anticipated and weaker participation. If that’s a blip in the trend, it’s no big deal. But a second consecutive month would deliver a sledgehammer to hopes of a lower terminal rate.

The Fed has remained extremely hawkish throughout all of this, through fear of feeding investors’ craving for a dovish pivot and unintentionally easing financial conditions. But another strong jobs report today would further justify such a hawkish approach and perhaps send risk assets into a bit of a tailspin as the prospect of a higher terminal rate increases alongside recession risks.

We don’t often put so much weight on one report but last month was a big setback and a second would make it very difficult to argue that the trend is still positive. Headline inflation will probably decline this year due to favourable base effects and lower energy prices but the Fed has for a long time now been much more fearful of entrenched inflation which is why there’s so much focus on the tightness of the labour market and wages. They’re unlikely to stop hiking soon unless there’s progress here.

ECB to be unfazed by inflation data

Eurozone inflation fell to 9.2%, well below the 9.6% expected and a big decline from November’s 10.1% reading. Policymakers at the ECB will not be in a celebratory mood though for a number of reasons. The most obvious is that it’s still way too high, almost five times its target.

The second is that it’s primarily driven by declines in energy prices which while helpful doesn’t solve the inflation problem. And finally, core inflation actually rose to 5.2% from 5% which proves there’s still work to be done. While the euro was choppy after the release, the consensus view appears to be that today’s data changes nothing and another 1% of rate hikes will come over the next couple of meetings.

Steadying after a rough week

Oil prices are creeping higher again this morning after steadying on Thursday. They came under some pressure over the previous 48 hours amid concerns about China’s economy over the next quarter or two. A lack of trustworthy data doesn’t help that situation but with Covid spreading so rapidly throughout the country, it’s likely there’s going to be disruption at the very least that will hamper economic activity and demand.

That will likely change in the second half of the year and the economic rebound could fuel more demand for crude and see prices rise once more. The state of the rest of the global economy by that point will determine just how supportive that would be for the price, among other things of course like Russian output and OPEC+ as a whole.

Strong jobs report could be a big blow

Gold pared gains on Thursday before steadying today ahead of the US jobs report. It remains very elevated after a strong start to the year and some weakness on wages and job growth could spark the rally back to life once more.

Of course, another strong jobs report could see its fortune shift the other way and push it back into a corrective phase after a strong recovery since early November. It appeared to be gearing up for a correction late last year but lower yields this week have given it a new lease of life. That could be quickly undone by another strong report.

Into the shadows

Bitcoin remains rangebound between $16,000 and $17,000 where it has spent much of the last month. The jobs report today may bring it back to life a little but in reality, crypto fans are probably happy to see it steadying and drifting into the background as the industry recovers from the trauma of the FTX collapse. It’s weak and vulnerable at the minute and any more shocks could be extremely damaging.