By Barani Krishnan
Investing.com - The U.S. job market isn’t giving up easily, meaning its ‘shadow’ — the oil market — won’t either. With neither slowing down significantly, good luck to the Fed in bringing down inflation meaningfully.
As the first Friday of the month allowed us a glimpse into how employment performed in the previous month, the May report from the Labor Department left the Federal Reserve feeling happy and queasy at the same time — a mixed emotion all too familiar of late with policy-makers at the central bank.
Employers added 390,000 jobs while the jobless rate remained steady at 3.6% for a third month in a row, according to the data that should embolden the Fed in carrying out more rate hikes to tame inflation running at 40-year highs.
On the surface, May’s gain in employment was the weakest since April 2021 and a further slide could come in months ahead. Yet, despite talk of hiring freezes, there are still nearly two job openings for every unemployed person — meaning outright job losses are unlikely near-term.
Thus, the mixed feeling.
“The Fed … will welcome the steadier jobless rate, firmer participation rate, and possible softening in wages, while worrying that the economy is still running too hot to convincingly drive inflation back to the target,” said Sal Guatieri, senior economist at BMO (TSX:BMO) Capital Markets.
The central bank is in its most aggressive price-fighting mode since the 1980s, when the legendary Paul Volcker was its chair.
What’s happening now is chillingly similar to then — a stock market in the dumps and oil prices off the charts.
What’s not the same is the job market. Unemployment then trended up from an annual average low of 3.5% in 1969 to 9.7% in 1982.
The current jobless pace of 3.6% — which falls below the Fed’s 4% marker for “maximum employment” — was arrived at after unemployment among Americans reached a record high of 14.8% in April 2020, with the loss of some 20 million positions in the aftermath of the coronavirus outbreak that year.
Since April 2021, wages of Americans have risen by a compounded 6.1%, averaging a monthly growth of 0.4% as hourly wages expanded every month except March, when they were flat. The Fed says this and the trillions of dollars disbursed by the government as aid during the pandemic are principally responsible for today’s inflation.
Economists worry that in its bid to fight inflation, the Fed will tip the United States into a recession. The economy has been on a weaker trajectory since the start of this year, experiencing a negative growth of 1.4% in the first quarter. If it does not return to positive territory by the second quarter, the economy will technically be in recession given that it takes just two straight negative quarters to account for a recession.
But some argue that the multiplier effect of rate hikes and a cutback in FOMC bond holdings could do a faster job in bringing price growth to parity with interest rates. June marks the start of what would be an accelerated pace of cutbacks on the central bank’s $9 trillion balance sheet, as it begins rolling off tens of billions of dollars worth of Treasury and mortgage-backed securities each month.
It’s ironic that a flourishing job market — the backbone of any dynamic economy — has to be slowed in order to “save” that same economy. Yet, that’s the situation with U.S. inflation, which both Fed Chair Jerome Powell and Treasury Secretary Janet Yellen — the two people in charge of America’s finances — admit they got totally wrong.
Logically, the labor market can’t stay like this if the Fed keeps hiking rates and mopping up liquidity, making it increasingly costly for businesses to borrow and expand. Not one voting official at the central bank’s Federal Open Market Committee seems to be in the mood to pause the ongoing QT, or quantitative tightening — the antonym to the more celebrated QE, or quantitative easing, which shaped much of Fed policy over the past two decades. Powell and his voting coterie at the FOMC say they are prepared to slow the economy if necessary — it will be — in order to stop inflation in its tracks.
Forsaking some jobs and economic growth for lower inflation is actually “a good thing”, President Joe Biden said at the White House on Friday as he joined the central bank in trying convince Americans that a “soft landing” — where demand is curbed enough without disrupting growth too much, a balance achieved by policymakers once only in the mid-90s — is possible after all.
"We aren't likely to see the kind of blockbuster job reports month after month like we had over this past year," Biden said as he gloated over what he called the strongest labor market of any presidency.
“But that's a sign of a healthy economy," he added.
Others have been less sanguine. Tesla’s Elon Musk and JPMorgan’s Jamie Dimon are prophesying nothing less than doom in the near future.
A "super bad" feeling about the job market and economy in the coming months is what Musk shared in an email to Tesla’s executives that was leaked to Reuters on Friday. The world’s richest man called on fellow billionaires to "pause all hiring worldwide". Tesla (NASDAQ:TSLA) itself will be reducing salaried headcount by 10% as it has become "overstaffed in many areas", he said. But jobs will grow for those “actually building cars, battery packs or installing solar", Musk said, adding that this meant "hourly headcount will increase” (not good for inflation).
Musk isn’t alone in his thinking. Ride-hailing companies Uber Technologies (NYSE:UBER) Inc and Lyft Inc (NASDAQ:LYFT) said last month they would scale back hiring and curtail spending, while online used-car retailer Carvana said it would cut 12% of its workforce, Reuters noted.
JPM’s Dimon, the self-anointed superhero in saving Americans from Bitcoin, said while he had previously forecast storm clouds over the economy, “I'm going to change it... it's a hurricane" now.
“You better brace yourself,” the head of the largest U.S. bank said. “JPMorgan is bracing ourselves and we're going to be very conservative with our balance sheet."
"Right now, it's kind of sunny. Things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or superstorm Sandy... or Andrew or something like that," Dimon said, making comparisons to legendary U.S. hurricanes.
The problem though is that the slowdown is coming too slowly.
Despite the doom prophesied by Musk, demand for workers is still huge, with 6,000 due to join Ford in the Midwest and 20,000 at Intel’s plant in Ohio, according to Biden, who wished the Tesla CEO and space travel enthusiast “lots of luck on his trip to the moon."
Ed Moya, analyst at online trading platform OANDA, concurs. “Softer hiring and cooler wage data suggest that economic growth moderation is happening, but not fast enough to signal a change in course by the Fed,” said Moya. “The consumer might be losing the battle with inflation, but spending won’t be weakening so quickly.”
US consumer confidence hit a three-month low in May, the Conference Board said. But economists expressed surprise on how relatively well consumer sentiment was holding up despite a drop in purchasing intentions for cars, homes, major appliances and a deference in even vacation plans.
And central to that inflation pressure are soaring oil and fuel prices.
In Friday’s post-settlement trade, both U.S. crude and its London peer Brent hit three-month highs above $120 a barrel.
The average price of gasoline at U.S. pumps hit all-time highs near $4.76 a gallon this week, up from $3.04 a year ago. Diesel averaged $5.58 a gallon, up from $3.19 a year ago.
The nexus between the job market and oil market is simple: the more people in employment each month, the more their usage of energy as they commute and move around.
Unless jobs growth slows appreciably, the tendency for the oil market now — under maximum supply duress and demand bustling at pre-pandemic highs — is to go higher and higher. Inflation will likely follow, despite the best efforts of policy-makers.
Good luck, Fed.
Oil: Market Activity and Weekly Settlements
Aside from the May jobs report, the oil market rallied on Friday for another reason: Mohammed bin Salman.
Crude prices settled at almost $120 a barrel on Friday after President Joe Biden played down the likelihood that he will travel to Saudi Arabia to meet its crown prince, who would be key to deciding whether OPEC puts out more barrels to provide relief to a market choked by sanctions on Russian oil.
“I have no direct plans at the moment to go to Saudi Arabia, but there is a possibility I will go to the Middle East,” Biden told reporters at the White House.
Brent, the global benchmark for crude, settled up $2.11, or 1.8%, at $119.72 for a barrel meant for August delivery. Earlier, it reached a session high of $120.05. For the week, Brent settled the week up 0.2%, finishing in the positive for a third straight week.
WTI, the benchmark for US crude, settled up $2, or 1.7%, at $118.87 per barrel, after an intraday peak at $119.41. For the week, it rose about 3%.
Brent and WTI settled up on Thursday despite headlines of a potential meeting between Biden and Mohammed in Salman, known as MbS to many. The reports said the president would be traveling to Riyadh for a summit with MbS and other Gulf Arab leaders under plans drawn up by the State Department.
The reports came just after OPEC+ — which groups the original 13 members of the Saudi-led OPEC, or the Organization of the Petroleum Exporting Countries, with 10 non-OPEC oil producers steered by Russia — said it will raise output by 648,000 barrels per day in July and 648,000 bpd in August.
That output was remarkably higher than the 432,000 bpd increments the group had been doing month after month over the past year. It was seen as the first sign of willingness by Saudi Arabia and others in OPEC+ to open their spigots more freely, especially after the European Union announced this week a ban of most Russian oil products that could alienate at least another 2 million barrels per day of supply.
After Thursday’s rally, crude prices barely fell on the OPEC+ news. And here’s probably why: the increments in July and August are to be divided proportionally across the group’s existing members and collaborators.
Included in the pact was Russia, which has already lost one million barrels in daily production due to sanctions, and countries such as Angola and Nigeria that have repeatedly failed to meet prescribed output targets.
Amrita Sen, co-founder of the Energy Aspects consultancy in London, said the real production boost over July-August would amount to around 560,000 barrels daily compared to the scheduled 1.3 million — because most in OPEC+ have already maxed out their production.
"These volumes will barely make a dent to the deficit in the market," she said in comments carried by Reuters.
Despite pressure from the West that it abandons Russia from the OPEC+ pact, Saudi Arabia has held on to its ally, saying it did not believe oil exports should be politicized over the Ukraine crisis.
That might be a reason for Biden not wanting to make a visit to Riyadh at this point, analysts said.
“He’s basically holding on to what he has said all long about MbS,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “He’s also probably looking to OPEC doing some real meaningful production hike instead of one that will not move the needle down at all on gas prices.”
Biden, when asked about the likelihood of a direct meeting with MbS, said: “Look, we're getting ahead of ourselves here. I'm not going to change my view on human rights, but as president of the United States, my job is to bring peace, and if I can bring peace, that's what I'm going to try to do. What I want to see is that we diminish the likelihood that there's a continuation of some of the senseless wars between Israel and the Arab Nations and that's when I'm focused [on].”
U.S. diplomats had apparently worked for weeks on organizing Biden's first visit to Riyadh after two years of strained relations over the slaying of Saudi-turned-U.S. resident Jamal Khashoggi and disagreements over human rights, the war in Yemen and US weapons supplies to the kingdom.
Just three months ago, MbS had reportedly refused to even speak on the phone with the president, who regarded the crown prince as a "pariah" for his alleged role in the 2018 killing and dismembering of Khashoggi, a Washington Post journalist who had severely criticized the crown prince.
The White House had appeared to mend fences with Riyadh on Thursday, when it said it recognized MbS’ role in extending a ceasefire in Yemen. It also said it appreciated the Saudi role in achieving the OPEC consensus on higher oil exports.
Biden thought differently when asked about it on Friday. “The OPEC announcement on increasing production [was] positive, but I'm not sure if it's enough,” he said.
WTI Technical Outlook
Oil has entered a seventh month of bullish rally, rising with six weeks of consistent positive closes and $130 is the next target, says Sunil Kumar Dixit, chief technical strategist at skcharting.com.
“The just-ended week’s long price action has further established strong bullish momentum that targets a retest of the $123 - $124.50 and $127 levels before retest of $130 if the rally gets adequate volume support,” said Dixit.
Stochastics, Relative Strength Index and Moving Average readings were also strongly supportive for a further upside, he added.
“Going into the week ahead, $115 will act as support. But weakness below $111 will put the brakes on the rally and momentum will turn into correction at that point, exposing oil to $100 and below.”
Gold: Weekly Market Activity & Technical Outlook
While the May jobs report brought boon to the oil market, it delivered gloom to gold as the potential of winding up further Fed aggression weighed on the yellow metal.
Front-month gold futures for June on Comex settled at $1,850.20 per ounce on Friday, down $21.20, or 1.1%. For the week, June gold slid $7.10 or 0.4%.
Dixit said the benchmark gold contract was at an inflection point and could go to $1,800 or even scale $1,900.
“We expect prices to remain volatile in the coming week,” the technical strategist said. “Consolidation above $1,850 can help gold retest $1,874 which could be the catalyst for a further upside to $1,893 and $1,903.”
Conversely, weakness below $1,850 could push June gold toward $1,835 and $1,828, he warned. “At that point, it will attract sellers aiming for $1,815 and $1,800.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.