Weak signals of labor market cooling do not change Fed’s plans

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Stock indexes end the week in the red. The dollar is stronger. The exchange rate of the main currency pair fell below 1.05 in recent days, and the week ends around this round level. Yields on 2-year US bonds rose early in the week, then fell on Wednesday and Thursday, and rose again on Friday. The US labor market continues to be strong, and the slight signs of cooling are so small that investors anticipate the Federal Reserve will raise interest rates again this year and maintain them for a long period in 2024.

The American job market did surprisingly well in September. Employment boosted sharply by 336,000. Moreover, data from the previous months were significantly revised upwards. This somehow questioned the recent decreasing employment growth trend. The market will probably look for confirmation in upcoming publications.

Pressure is therefore growing for another interest rate hike in the US. Admittedly, wage growth fell slightly again in September, which is positive for inflation prospects. However, the rest of the data does not suggest that the labor market is moving towards a better balance of supply and demand. The Fed is probably wondering whether the easing of wages is permanent or only a temporary phenomenon.

No employment data will be received before the next meeting (October 31 – November 1), so next week the market’s attention will be focused on inflation from the United States, which could be key for the Fed to take the next decision.

The commodity market is also interesting. In the middle of the last week of September, the price of Brent oil was heading towards the psychological barrier of 100 dollars per barrel. Current quotations are already below 85 USD. Last Wednesday the market experienced the biggest daily loss in over a year. It could be said that market sentiment has somewhat changed. It is unknown for how long. Attention has shifted from limited supply to worries about weaker global demand. The trend reversal occurred when the US Department of Energy reported that the average demand for gasoline in the United States in the last four weeks had fallen to the lowest level for this time of year in 25 years.

Next week will bring additional reports from the US Energy Information Agency, OPEC, and the International Energy Agency. They will probably confirm the image of inadequate supply in the market, and maybe oil will return to gains and last days’ movement will need to be treated only as a corrective decrease in the medium-term uptrend. Maybe institutions will have to slightly revise their demand forecasts downward, but the image of a market deficit this year should still be valid.

This week’s declines were not halted by the recommendations of the Joint Ministerial Monitoring Committee of OPEC+ (JMMC), which pertained to agreed production targets. The UAE energy minister described the policy pursued by the cartel as “appropriate” for the oil market. Moreover, Saudi Arabia and Russia confirmed that they would limit supply until the end of the year, as they had previously declared.

Nevertheless, in a few days, the price of Brent and WTI corrected the gains accumulated throughout almost the entire September. The current declines are the largest in the entire uptrend that began at the end of June. Quotations broke the trend line and from a technical point of view, we received a negative signal. So far, the strong report from the US job market has caused a slight increase in commodity prices.

Łukasz Zembik Oanda TMS Brokers