Falling Oil, Focus on US Jobs, Eurozone Inflation
Intense crude oil selling pulled the price per barrel around $100bp, which is the critical 50 DMA support for crude’s latest rally.
The question is whether Washington could reverse the positive momentum in oil prices with its promise to release one million barrels of oil from strategic reserves per day, for the next six months starting next month.
If history is any indication, strategic oil reserves have a short-term easing effect on oil prices, which is then followed by a rebound to higher levels, as additional barrels are a quick fix. which does not resolve the longer-term supply shortfall. . The $100 bp level is critical. The removal of this support could pave the way for a further decline towards the 88bps, which coincides with the 100-DMA and the major Fibonacci retracement of 61.8% during the last rally from December to March. Still, failure to break through the 100 pence resistance could reinforce the idea that energy prices will continue to rise, and that there is nothing the US can do about it.
And oh, OPEC and Russia agreed on Thursday to modestly increase oil production as widely expected, but more importantly they ditched the International Energy Agency as a source of data, a sign of deterioration of relations with the West. Not only is OPEC not standing with the West in the battle to weaken Russia, but the bond with the West seems to be weakening, which certainly calls for more headaches in the future, and well, higher prices. Thus, production was increased to 432,000 a barrel, against 400,000 previously. The extra 32,000 barrels a day are just a joke in the face of the worsening energy crisis the world is going through. The decision comes just in time for April Fool’s Day!
Can’t ignore curve inversion
Falling oil prices couldn’t prevent a massive sell-off in stocks yesterday as investors continued to worry about the 2-10 year curve inversion and accompanying recession rumors . The S&P500 lost over 1.50% yesterday and the Nasdaq failed to extend its gains above the 200-DMA.
The latest Caixin PMI manufacturing index fell below 50, showing Chinese manufacturing activity contracted in March as the latest measures to contain the Covid outbreak weighed heavily on economic activity. If China continues to insist on its utopian policy of zero Covid, we could see a further slowdown in the recovery. And of course, when China sneezes, the world catches a cold: slower business in China also means longer waiting times, a deeper supply chain crisis and additional pressure on prices for consumption, for everyone.
Today, the US will reveal how many non-farm payrolls the US economy created last month, and Europe will reveal the bad inflation it had in March. According to the Bloomberg survey, the US economy may have added nearly half a million new non-farm jobs in March. The average hourly wage, closely watched because of its potential impact on inflation, could have fallen from 5.1% to 5.5%. A strong NFP print, combined with strong growth in people’s wages, could further spur Federal Reserve (Fed) hawks, pushing the short end of the yield curve higher and weighing on the mood in riskier markets. While a soft reading will hardly raise Fed doves, as the Fed cannot do so many things at once; it must solve the problem of rising inflation.
Speaking of inflation, the European Central Bank (ECB) should also tackle the inflation problem, in theory, as price stability is its main objective. The flash inflation numbers will confirm how quickly inflation is rising in Europe after inflation in Germany topped the 7% mark and inflation in Spain approached 10%. Although Christine Lagarde pushes back against the idea that the ECB should act quickly to ease the pressure on consumer prices, the market is starting to prepare for a 50 basis point hike before the end of the year to rein in inflation. EURUSD extended gains to 1.1185 yesterday before falling back to 1.1060 this morning. The incentive to buy a dip is clearly there as the ECB will certainly cave to mounting pressure to raise rates, but when is the million dollar question. I wouldn’t bet on any big upside potential until we hear a more aggressive tone from the ECB, as Lagarde doesn’t seem to be letting his guard down on mounting inflationary pressures, yet.