MARKETS
Stocks opened to a cautious note in Asia on Monday as investors chew over the impact of the robust U.S. jobs report against the backdrop of an accelerated shift toward reopening the Chinese economy.
Focus on China’s potential “reopening” picked up steam again last week and fueled market optimism about the tailwinds of a likely acceleration in growth in 2023 for China-sensitive assets. Although there have been several local changes to Covid policies, China has yet to shift away from the Zero Covid policy officially. Instead, they are trying to balance the expected reopening surge in Omicron cases against minimizing economic and social costs.
The long and winding road for the world’s most populous and second-largest economy to reopen after almost three years of zero-Covid policy will probably take more work.
After spending much of the week firmly locked in rally mode in the wake of Chair Powell’s latest ruminations, markets received a bold-as-brass surprise from an upstart U.S. payrolls report on Friday. While ignoring the pivot script of fading growth and ebbing inflation, jobs instead posted a backslapping 263,000 advance in November, coupled with a sturdy 5.1% y/y average hourly earnings gain.
Still, after the dust settled, U.S. yields ended the week moderately lower, while the S&P 500 eked out a modest gain even with a late-week retreat.
Although one should take caution reading too much into one jobs report, the hearty NFP beat does suggest the rumours of growth’s demise have been greatly exaggerated.
Despite plenty of volatility, including a strong but maybe curious S & P 500 rally on the back of a speech from Fed Chair Powell, markets remain gingerly supported by guidance to a 50 bp downshift in December.
Still, investors could be challenged to break higher ground as Friday better than expected jobs data suggests that sticky services inflation, primarily dictated by a still-too-tight job market, will keep the Fed higher for longer.
OIL
OPEC+ plans to keep production steady but stands ready to intervene as Price caps, embargos, and China’s reopening impacts get quantified as to whether there will be a flow disruption or whether Russia has viable plans of retaliation.
With recessionary overtures playing louder in the background, OPEC’s interventionist aim is likely to keep crude prices from sliding below $80 a barrel, the minimum needed to spare them fiscal trouble. So, if fundamental conditions deteriorate, oil traders should expect some form of immediate production intervention. Hence prices should remain supported on dips below $85
With India and possibly China continuing to purchase Russian crude using alternatives to Western services, it will dilute the effect of the sanctions.
But there are limited options that can securely transport Russian oil to markets, so the focus will fall on tanker trackers and Russian export levels.
Over in Asia, China’s reopening sentiment should provide a plank for the crude price to springboard off. And the faster the market prices in reopening-driven growth acceleration, the higher oil prices will go.
The combination of rising cases, some regions loosening policies, the winter flu season, and the upcoming Lunar New Year, when hundreds of millions of people typically travel, makes it difficult to predict how mobility will evolve against the backdrop of skyrocketing Covid cases.
As usual, there is plenty of Monday morning noise in the oil market, which will undoubtedly lead to a significant uptick in volatility as traders try to iron out these evolving narratives.
FOREX
The U.S. dollar is still struggling for traction in the wake of Chair Powell’s speech. The lack of a hawkish beatdown, above and beyond what is already priced into the market, continues to see the dollar rallies quickly fade. Not even a beefy payroll number offered a lengthy lifeline to the buck, as the EURUSD is still sitting with ample headroom above 1.05 this morning.
While the ultimate destination of policy rate usually counts more, setting a gentler course towards the terminal tends to ease financial conditions by lowering rate volatility and skewing F.X. traders to respond more to downside surprises while looking through upside surprises. Indeed, this will be especially important in the context of fairly robust economic data, including Friday’s employment report, which played to the ” look through ” script.
Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT
