Stock investors are braced for a rocky start to the week as markets continue to digest surprisingly strong US payroll data and potential fallout in global oil markets as the West cracks down on Russian supplies.
On the job market front, government data on Friday showed the US added +263,000 jobs, in spite of a growing wave of layoff headlines. This was only a slight drop from the upwardly revised gain of +284,000 jobs added in October.
More concerning is the fact that wage gains accelerated again in November, raising the year-over-year hourly earnings to +5.1%. Bears argue the November data implies that the Federal Reserve’s tightening campaign has failed to cool the job market, meaning there is little justification for the central bank to begin aggressively backing off. Fed Chair Jerome Powell last week cited “labor costs” as a key area the central bank was monitoring – along with supply chain issues and housing costs – for signs that inflation is on its way out.
Powell last week also implied the Fed could begin issuing lower rate hikes as soon as the December 13-14 meeting, reinforcing expectations for a 50-basis point hike rather than 75-basis-points like we have been digesting.
The latest jobs report, which is the last one before the next Fed meeting, has some on Wall Street now questioning if and when the Fed will be able to reverse ship and start to roll out a much more accommodative policy.
Investors begin this week also trying to determine the potential impact to global oil markets following two key decisions made over the weekend. Late on Friday, the Group of Seven (aka G7, which includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the US, as well as the European Union) along with Australia set their long-awaited price cap on Russian seaborne crude at $60, effective as of today, December 5.
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Essentially, buyers of Russian crude won’t be able to insure their cargoes unless it is bought for less than the cap price. This strategy was chosen because most shipping and insurance firms are based in G7 countries. The deal allows for a 45-day transitional period for vessels already loaded, so any barrels already under contract but not-yet loaded could experience some complications.
However, oil insiders say most Russia crude going to key buyers – primarily China and India – has already been trading as low as $50 by many accounts, so there ultimately may not be much disruption to oil flows.
Not surprisingly, Russia says it won’t sell oil below the price cap or to countries participating in the restrictions. But again, Russian crude has already been trading well below $60, so the threat may not carry much weight when it’s all said and done.
The price cap comes on top of the new EU ban on seaborne imports of Russian oil, which also goes into effect today. A ban on Russian oil-product imports (gasoline, diesel, etc.) is set to follow on February 5. Despite the possible disruptions to Russian crude supplies, OPEC+ on Sunday agreed to keep its production targets unchanged, which leaves in place the previous cut of -2 million barrels per day made back in October.
There had been some speculation the oil group might increase production to fill any possible gaps left by Russian crude disruptions. However, with oil prices down some -13% in just the last month, OPEC is more concerned with weakening global demand, much of which stems from China’s sputtering economy.
OPEC+ is not scheduled to discuss production levels again until June 4, 2023, although the group said it was ready to meet again at any time to “address market developments.”
Today, US economic data will provide more insights into both inflation and manufacturing activity with the ISM Services Index, PMI Composite, and Factory Orders.
There aren’t many major earnings left to report, so look for the macro media headlines to more heavily impact trading into the holidays!
What Do You Need To Know About Labor and Oil Markets?
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