The economy is too strong for the Fed to pivot. The strong start to October is over after both a private payroll report and service sector data reminded investors how strong some parts of the economy remain. Deteriorating economic data is needed to drive down inflation and for the Fed to consider a slower pace of tightening. If we continue to see resilience in the service sector, the Fed may have to remain aggressive with its rate hiking cycle.
Before the end of the year, but definitely not this month, the Fed will temper its hawkish stance. Inflation is still the driving focus and that data is not softening quickly enough.
ADP/ISM Services
A private payrolls report showed 208,000 jobs were created in September, roughly in-line with the 200,000-consensus estimate. After a couple downbeat labor data readings, the ISM manufacturing employment component fell into contraction and data lost more than a million job openings, Wall Street was starting to grow confident that a labor market slowdown had arrived. Hiring is slowing, but it seems the service sector is still holding up. The ADP report showed the goods-producing sector lost 29,000 jobs, while service-providing jobs showed a gain of 237,000 positions. The ISM Services employment rose sharply to the highest levels in March.
Traders might be disappointed if they were hoping for a sharp deterioration in hiring with the . The early October rally might completely fade if the nonfarm payroll shows steady hiring and continued wage pressures.
OPEC+
OPEC+ agreed to cut its production target by 2 million barrels a day. OPEC+ is keeping the oil market tight with the biggest output cut since 2020. The production cut was driven by uncertainty that surrounds the global economic and oil market outlooks. The OPEC+ target is now 10.5 million bpd, which, according to the Saudis is a real cut between 1 to 1.1 million bpd. The next ministerial meeting will be on Dec. 4. The plan is now for them to have ministerial meetings every six months and the monthly JMMC meetings will now happen every two months.
The EIA crude oil inventory showed crude, gasoline, and distillate inventories continue to fall. This report was mostly bullish given a headline draw, rebound in gasoline demand, steady production, and steady exports above 4 million barrels a day.
Oil should remain supported here following OPEC+ decision and EIA report, but upside will be capped well in advance of the $100-a-barrel level.
After the OPEC+ meeting, Russia’s Novak said it could cut output if an oil price cap is put in place. Novak is signalling that Russia is not desperate for revenues and if this cap moves forward, we could see oil prices extend gains.
Gold
edged lower after the bond market said not so fast with the collapse of global bond rates. A strong private payrolls report reminded investors that there is still strength in the labor market that could allow the Fed to remain aggressive beyond the next two FOMC meetings.
Gold needs to see a sharper slowdown in the U.S. and cooler prices for a bullish breakout to form. Gold seems poised to consolidate between $1680 and $1740 until we get both the NFP report and latest inflation readings.
Crypto
Reversal Wednesday is here, and risk aversion has taken tentatively below the $20,000 level. The strong start to October is over and markets were quickly reminded that Fed pivot calls were premature once again. After an ADP employment change report and ISM Services Index, traders were quickly reminded that the economy isn’t falling off a cliff and that the Fed might have to remain aggressive with its rate hiking cycle next year.
Bitcoin’s fundamentals still support a healthy consolidation here and that should remain the case as long as we don’t see a double dose of robust hiring on Friday and much hotter-than-expected inflation next week.
