Bad news was seen as good news yesterday, and US equities reversed their losses on the back of a sharply below-expected ADP report, which showed the US economy added the lowest number of private payrolls since the start of pandemic recovery.
The sharp disappointment over the data reignited Federal Reserve (Fed) hawks and raised the notion that the Fed could ease its tightening plans if the economy begins to suffer from tighter policy. But that’s unlikely. Fed rates are at historic lows, inflation is at a 40-year high, and the U.S. job market has recovered relatively well — total work hours have just fallen below pre-pandemic levels in April, and today’s data may even reveal that Americans worked more hours in May than before the pandemic began.
Thus, the Fed will certainly not change its mind on the weak jobs data. Fed Vice Chairman Lael Brainard has been clear that the Fed is unlikely to stop raising rates after the two 50 basis point hikes expected at the next two FOMC meetings. The days of the Fed pumping money into the market to stimulate employment are over. We are in a new era, one of high inflation, and weak jobs will do little to prevent the Fed from raising rates.
What’s more, yesterday’s JOLT data showed a record number of job openings, which means the shortage of jobs isn’t the problem – making the focus on jobs even less relevant.
But, there is a silver lining to bad jobs data. If the job recovery and wage growth slow, households could spend less, and lower spending would have a negative impact on inflation. Yet lower spending isn’t necessarily positive for corporate profits and, more importantly, inflation stems primarily from supply issues, soaring energy prices from the war in Ukraine and weak production and supply chain issues due to the pandemic. Therefore, killing spending should have an easing effect on inflation – which is why the Fed is doing what it is doing – but it could take longer than a few months to see the desired effects. As a result, poor jobs data should keep stocks under pressure, making post-data gains highly vulnerable.
The S&P500 and Nasdaq recovered to their highest levels in a month yesterday, as the US 10-year yield stabilized just slightly above the 2.90% level. The US dollar index eased and investors are waiting for May’s jobs report to shed some more light on the US employment situation. The United States is expected to have created some 325,000 new non-farm payrolls in May, with wage growth slower by 5.5 to 5.2%. It seems that a weak NFP figure can be interpreted as “good news”. But that optimism won’t necessarily last long unless other factors like wage growth and energy prices point to slowing inflation.
What a surprise
OPEC came as a big surprise yesterday as the cartel announced it would increase production target by 50%, to partly compensate for the oil that Russia will not pump, following the European decision to ban oil imports from Russia.
U.S. crude fell to $111 a barrel yesterday, but rallied on OPEC’s decision as traders struggled to convince OPEC could increase output that much, due to potential capacity constraints. However, the cartel managed to exceed its production target last month, and challenges in countries like Nigeria and Angola may not stop Saudi Arabia and the United Arab Emirates from pumping more.
Yesterday’s decision is a big step for Saudi-US relations. The United States has been pushing OPEC for months to do something to tame the unbearable pressure on oil prices, and Saudi Arabia has done nothing as diplomatic relations have cooled between the two countries since the murder. of Khasshoggi in 2018 in Istanbul. Still, Americans’ growing pain at the pump is encouraging Joe Biden to make an effort to improve his relationship with Saudi Arabia. He is expected to travel to Riyadh in the coming weeks.
So yesterday’s decision is a sign that the ice between Saudi Arabia and the United States may finally be melting after two years of frosty relations – meaning we may be at a political crossroads. If the United States could strengthen its ties with Saudi Arabia, Saudi Arabia would pump more to compensate for the loss of Russian oil. More oil could slow and ideally reverse the oil rally, ease inflationary pressures and even isolate Russia to hopefully turn the tide of the Ukrainian war.