Markets Wrap (1H October)
The rumors of the US labour market demise have been greatly exaggerated
Ever since the dismal US jobs report at the start of September, the market has feared a further deterioration. The problem is that usually once the labour situation starts deteriorating, the trend continues for a long while. At the start of October, the job figures have delivered a reversal and the market has seen a positive job growth surprise far above the long-term trend. Furthermore, the previous figures have been revised upwards, but it is crucial to understand and remember, that this data series is rather volatile, and the recent good figures can also be revised down. The unemployment rate has seen a drop back to 4,1%. While these are great signs for the US economy, the rate cut camp has had a significant blow.
Interest rates should be on a gradual decline
Inflation in September (2,3%) decreased slower than markets have expected (2,2%) and part of the slowdown was caused by lower energy prices which ever since have bounced back. Average hourly earnings are growing, Atlanta FED “GDPNow” forecasts that the economy last quarter expanded at a 3,2% annual rate. With all of this in mind the markets have taken a U-turn regarding the possible FED cuts. All bets on possible 0,5%p cuts in upcoming meetings have been taken off and markets see regular gradual 0,25%p at meetings. However, if the US economy will continue to grow at current pace even the steady rate cuts might come in to question. So far the US has managed to grow at a pace that surprised most and the trend signals that this could be maintained.
ECB will cut in October and December, but what comes after?
Rate cuts expectations have been more stable in eurozone than in the US. A large part of this is due to lower current policy rates. However, unlike the FED, ECB is very reluctant to give any forward guidance that would help the markets estimate the path of policy rates. Due to this its rather hard to estimate the floor of interest rates. Of course, there are subjective estimates of the neutral or long-run equilibrium interest rate, but they are non-observable and highly subjective. This is why the markets (and it seems ECB itself) rather depend on the observable current data and use it as imperfect proxies of where rates are going. As an example, the latest PMI figures have helped to facilitate a cut for October and to lower overall rate expectations. The headline inflation easing below 2% without a doubt makes the ECB policymakers decision easier. This year’s rate cutting looks to be a done deal – 3% should be reached in December, but the main question remains where the rates will go in the medium-long term. Sadly, October’s ECB meeting will not answer this question.
Oil market finally reacts to geopolitics
2024 has been a comparatively calm year in oil markets - few sudden developments and for a long time implied volatility has declined. However, the second half of the year brought the anticipation of OPEC+ led market glut and with it record low investor positioning in the commodity. At this point Israel-Iran conflict has brought the risk back in to the market and brought Brent prices back to 80 USD/bl. The two-fold risk remains, as the conflict boils further and OPEC+ moves are still free flowing.
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