Basket Village USA
MARKETS
US stocks were weaker on Friday, with S&P down 2.8% as strong US payrolls keep pressure on the Fed. US 10-year yields closed 6 bps at 3.88%, up about the same amount over the week. Oil moved closer to $100/bbl, up another 4.3% to $98.45.
In the wake of the super strong US jobs report, stocks quickly fell. It looks like the end of a bruising week is likely to extend for at least another round as active investor sentiment remains very bearish.
Everyone on the street knows that the Fed is watching the labor market like a “hawk”. With the unemployment rate falling, this is unlikely to convince anyone that the current pace of monetary policy tightening is working. Therefore, the FOMC’s reaction function could shift from “inflation, inflation, inflation” to “inflation, labor markets, inflation,” especially as the U.S. economy appears less sensitive to rates than the others.
While the labor market still appears to be buzzing, for now Fed officials and market participants will focus on one thing only, inflation data – in particular, the September CPI release from Thursday.
With gasoline prices down almost 7% from August to September, energy is likely to weigh on the CPI print; however, Core CPI will get the most attention, especially given last month’s upside surprise.
But with oil prices rising again after OPEC’s production cut, it certainly complicates any idea of ”peak inflation.”
On a geopolitical scale, tensions between Russia and the West are once again reaching new heights, with the bitter dispute behind the Nord Stream pipeline leak escalating. And new sanctions are being considered following the official annexations of regions of Ukraine.
OIL
Oil rebounded on Friday after strong U.S. jobs data suggested the world’s largest oil-consuming economy showed few signs of easing.
However, prices are trading at early trade highs in Asia as the oil complex awaits a team from the Biden administration and the Fed.
The White House intervention will take the form of releases of strategic petroleum reserves that are currently being offered to eight companies, the DoE announced on Friday.
The Fed will attempt to calm gasoline demand via higher and longer interest rates specifically designed to slow the US economy.
The extraordinary OPEC production cut is strongly supporting prices and providing a solid safety net that traders can use in the event of a downturn. More critical is the bullish signal that OPEC+ is sending here by responding to short-term market momentum by pushing prices higher despite the idea that demand growth will outpace supply growth. So while thoughts of policy intervention could temper the upside, with OPEC appearing willing to adjust to any price declines, US policy maneuvering is unlikely to dampen a gradual price increase until a full US recession hits.
The temptation for long trade with China may start to mount before October 16, when the 20th National Congress of the Communist Party of China is due to open.
FOREX
All roads lead to the USD higher. The Federal Reserve wants a slowdown in the labor force, which is not visible. Friday’s figure should give the green light for another 75bp to 50bp trajectory through the end of the year, and the Fed won’t deviate from the hawkish commentary at all. Other global central banks may be starting to change, but not the US, so at the moment the higher USD is still the path of least resistance.
The relentless strength of the dollar has exacerbated the “hunt for dollars” in all foreign exchange markets.
FX Asia
And after the release of foreign exchange reserve figures from China and Korea this week, the common theme of shrinking foreign exchange reserves in the G10 and emerging markets. The continuation of this broad cut could pose a danger to central banks whose dollar reserve war chests are running low but still want to keep a lid on some recent volatile moves.
Given the beta of the ASEAN basket against the CNH, rising oil prices and continued sensitivity to initial US rates, expect USD/ASIA to remain bullish.
Ahead of the Party Congress starting on October 16, Chinese authorities may take more initiative in managing RMB weakness, leading to smaller movements and less volatility. But widening interest rate differentials between the United States and China will likely further incentivize foreign companies to exit and should keep the currency under pressure.
The Malaysian Ringgit opens a bit softer this morning on broader US Dollar strength supported by higher US yield. Nonetheless, the opening weakness is likely mitigated by higher energy prices.
All in all, I expect a lanky type market across the FX complex ahead of the US CPI on Thursday.
