Author – Barani Krishnan
Investing.com – US Job Market Doesn’t Just Give Up, So It’s “Shadow” ” (Oil market) not. Good luck to the Fed keeping inflation low in a meaningful way while neither of them slow significantly.
We saw the May report from the Department of Labor on the first Friday of the month. The report made the Fed both happy and unhappy – a mixed feeling that central bank policymakers have known all too well of late.
Employers hired 390,000 people, according to the data, while the unemployment rate remained stable at 3.6% for the third straight month. These could prompt the Fed to hike rates further in a bid to contain inflation at 40-year highs.
May job growth appears to be the weakest since April 2021 and could weaken in the coming months. Despite talk of a hiring freeze, there are still about two jobs for every unemployed person – so a definitive job cut is unlikely in the short term.
Well, mixed feelings.
Sal Guatieri, senior economist at BMO Capital Markets, said: “The Fed … welcomes the stabilization in the unemployment rate, the increased participation rate and possible wage cuts, but will be concerned that the economy is still too hot to handle to bring inflation back on target.” said.
The central bank is in the most aggressive price war since the 1980s, when the legendary Paul Volcker was President.
What’s happening now is eerily similar to what happened then – a poor stock market and unorthodox oil prices.
What is not the same is the labor market. At that time, the unemployment rate had risen from an average of 3.5% in 1969 to 9.7% in 1982.
The current unemployment rate of 3.6% – below the 4% set by the Fed for “full employment” – comes the point after the unemployment rate among Americans hit a record 14.8% in April 2020. Nearly 20 million jobs were lost in the United States this year following the outbreak of the coronavirus.
Americans’ wages are also up 6.1%, an average increase of 0.4%, with hourly wages increasing every month since April 2021 except March when they were stable . The Fed says it’s the trillions of dollars the government has spent on aid during this and pandemic times that are primarily responsible for today’s inflation.
Economists are concerned that the Fed will push the US into recession while fighting inflation. Since the beginning of the year, the economy has been on a weaker course with a minus of 1.4% in the first quarter. If it doesn’t return to positive territory by Q2, the economy will technically enter a recession. Two negative quarters in a row is enough for a recession.
However, some argue that rate hikes and reductions in FOMC bond holdings can speed up the task of equating price growth with interest rates. June appears to be the start of an accelerated rundown of the central bank’s $9 trillion balance sheet.
It is ironic that in order to ‘save’ the same economy, a booming job market that is the backbone of any vibrant economy must be slowed down. But such is the case with US inflation, which Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, who are in charge of America’s finances, admit they were all wrong.
Logically, if the Fed keeps raising interest rates and squashing liquidity, and it becomes ever more expensive to borrow and expand, the market cannot stay this way. No one at the central bank with voting rights in the FOMC seems in the mood to halt the ongoing quantitative tightening (QT) (as opposed to the quantitative easing (QE) that has shaped much of Fed policy over the last two years). Powell and his FOMC constituents say they stand ready to tighten the economy if necessary – which they will – in order to restart inflation.
Speaking at the White House on Friday, President Joe Biden said that sacrificing some jobs and economic growth to reduce inflation is actually a “good thing”. The President joined the Fed in convincing Americans of the possibility of a “soft landing,” which politicians had only achieved once in the mid-1990s, when demand was subdued enough without stifling growth too much.
While Biden cheered on the job market, which was unprecedented in any presidential term, “it’s not possible for us to see record-breaking employment reports like last year every month,” said.
“But that indicates a healthy economy.”
Others are not so optimistic. Tesla’s Elon Musk and JPMorgan’s Jamie Dimon believe the apocalypse is upon us in the near future.
In an email leaked to Reuters on Friday, Tesla said it felt “very bad” about the job market and economic conditions in the coming months. The world’s richest person has urged other billionaires to “stop hiring worldwide”. Musk said there are “too many employees in many areas” and that Tesla (NASDAQ: TSLA ) is reducing its workforce by 10%. However, things will increase for “cars, battery packs or solar arrays actually,” Musk said. He added that this means “the number of hourly workers will increase” (not good for inflation).
Musk is not alone in his thoughts. Driver-call companies Uber Technologies (NYSE: UBER ) Inc and Lyft Inc (NASDAQ: LYFT ) last month announced online used car retailer Carvana to cut 12% of its workforce.
JPM’s Dimon forecast storm clouds over economy as ‘I’m changing, it’s a hurricane’. said.
“You had better prepare yourself. JPMorgan (NYSE: JPM ) preparing, we will be very conservative on our balance sheet.”
“It’s sunny now, doing well. Everyone thinks the Fed can handle it. This hurricane is on the horizon heading towards us. We don’t know if it’s a small hurricane or a super storm like Sandy … or Andrew.”
The problem is that this regression is very slow.
Despite Musk’s pessimistic prophecy, labor demand remains high: 6,000 in the Midwest, according to Biden, Ford (IS: FROTO ) and 20,000 in Intel’s Ohio will enter the facility.
OANDA Analyst Ed Moya agrees:
“Data showing slower hiring and lower wages suggests economic growth is slowing, but not at a pace that supports course the Fed will change. The consumer may be losing the battle against inflation, but spending will not ease anytime soon.”
US consumer confidence fell to a three-month low in May, the Conference Board said. However, economists have expressed surprise that consumer sentiment is in relatively good shape, despite lower intentions to buy cars, homes, appliances and even some resignation to holiday plans.
And at the heart of these inflationary pressures are rising oil and fuel prices.
WTI and Brent hit three-month highs above $120 on Friday.
The average price of gasoline at the pump in the US hit an all-time high this week, approaching $4.76 compared to $3.04 a year ago. Diesel was $3.19 a year ago, now $5.58 on average.
The connection between the labor market and the oil market is simple: as the monthly number of employees increases, so does the energy consumption for commuting.
Unless job growth slows significantly, the oil market will continue to trend higher – amid maximum supply pressures and demand remaining at pre-pandemic highs. Inflation is likely to follow, despite policymakers’ best efforts.
Good luck Fed.
Oil: Market Activity and Weekly Closes
Besides the May jobs report, there was another reason for Friday’s oil market rally: Mohammed bin Salman.
Crude oil prices approached $120 on Friday after President Joe Biden touted the possibility of a trip to Saudi Arabia to visit the crown prince as trivial.
Biden told reporters at the White House, “I have no direct plans to go to Saudi Arabia at the moment, but there is a possibility of going to the Middle East,” said.
Brent rose $2.11 to $119.72. It had previously seen session highs at $120.05. On a weekly basis, it ended the third straight week up 0.2%.
WTI rose $2 to $118.87. It ended the week up 3%.
Brent and WTI rose on Thursday despite the possibility of a Biden-Mohammed bin Salman (MbS) meeting. The President was reportedly to travel to Riyadh for a summit with MbS and other Arab leaders in the Gulf as part of State Department plans.
These reports come shortly after OPEC+ announced it will increase production by 648,000 per day in July and August.
This is significantly higher than the monthly increase of 432,000 barrels per day last year. That decision was interpreted as the first sign that Saudi Arabia and other members of OPEC+ want to be more comfortable opening the oil taps, especially after the EU announced a significant ban on Russian oil products this week.
Crude oil prices were little down after Thursday’s rally on OPEC+ news. Probably why: increases in July and August are split proportionally between the current members of the group and their alliances.
Countries like Russia, which has lost about 1 million barrels of daily production due to sanctions, as well as Angola and Nigeria, which cannot meet the set production targets, are also part of the agreement.
Amrita Sen, co-founder of London-based consultancy Energy Aspects, said the actual increase in production in July-August would be around 560,000 barrels a day from the planned 1.3 million. “Because most of the guys in the group have already maxed out their production.”
According to Reuters, “these volumes are unlikely to fill the gap in the market,” said.
Despite Western pressure to remove Russia from the OPEC+ pact, Saudi Arabia did not leave the alliance and said it believed oil exports should not be politicized over the Ukraine crisis.
According to analysts, this could be a reason why Biden did not want to visit Riyadh.
Capital’s John Kilduff again: “Biden sticks to what he’s been saying about MbS for a long time,” said. “He also probably wants OPEC to make a real production increase and not a production increase that doesn’t lower gas prices at all.” Look, we’re outdoing ourselves here. With human rights. I will not change my mind on this subject, but my job as President of the United States is to bring peace, and I will try to do that. I want to make sure that we reduce the likelihood that some senseless wars between Israel and the Arab nations will continue…”
It appears US diplomat Jamal Khashoggi has been working on this for weeks, Biden’s first Organizing visit to Riyadh after two years of strained relations with the 2018 killing of MbS and the dismemberment of Khashoggi, a Washington Post journalist who had harshly criticized the crown prince, it was reported that he refused even with the phoning the President, who viewed the Crown Prince as an “outcast” for his alleged involvement in the unrest.
On Thursday, the White House appeared to have committed itself to Riyadh when it said it recognized MbS’s role in extending Yemen’s ceasefire. He also said he appreciates the Saudi role in reaching a consensus in OPEC on boosting oil exports.
Biden thought differently when asked Friday: “OPEC’s decision to increase production is positive, but I’m not sure it’s enough.”
WTI Technical Analysis
Oil has entered the seventh month of the bullish rally after closing positive at $130 for six consecutive weeks, according to skcharting.com’s Sunil Kumar Dixit , next goal.
“Long price action of just ended week has created strong bullish momentum targeting a retest of $123-124.50 and $127 before a retest of $130 if the rally has enough volume support.”
Stochastic, Relative Strength Index and Moving Average readings are also strongly supporting bullish momentum.
“Next week support level will be $115. However, a drop below $111 will put a brake on the rally and momentum will return to a correction at $100 and below at that point.”
Gold: Weekly Market Activity and Technical Analysis
The May jobs report offered boons for the oil market but also pushed gold lower under pressure from the possibility that the Fed could make more becomes aggressive.
June Gold Futures fell $21.20 to $1,850.20 on Friday. It fell $7.10 this week.
Dixit said the gold contract is at a breaking point and could reach $1,800 or even $1,900.
“We expect prices to remain volatile next week. A consolidation above $1,850 could help gold retest $1,874. Conversely, a drop below $1,850 could drop to $1,835 and $1,828, Dixit warns. “It will attract sellers targeting $1,815 and $1,800 at this point.”
Disclaimer: Barani Krishnan has no position in the commodities or securities subscribed to by him.