Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
Just when Central Bankers thought stability might be forming around inflation, OPEC+ dropped a clanger and announced production cuts of 1.1mn bpd and called it a precautionary measure. Saudi Arabia’s energy minister cited several reasons, one being to target short sellers and make “the guys in the trading floor be as jumpy as possible”. It is alleged short sellers, on the back of the recent banking crisis, were betting it would lead to a fall in oil prices. OPEC+ supplies 60% of the world’s petroleum trade Instantly, oil price forecasts started to rise…..$90 bp, then $95 bp and then $100 pb. This was unexpected – especially as two weeks before this announcement, they had stated their intention to raise production 2.32mn bpd this year on rising demand (China reopening). It is a significant reduction in a market where supply was already looking tight towards the end of last year (IEA data showed Q3 and Q4 averaging a deficit of between 0.75mn and 1.1mn bpd). Throw these cuts into the mix and suddenly you are looking at an even bigger deficit. We won’t be finding any solace from the US Shale industry either. Not only is shale oil production still below its pre-pandemic highs, the reinvestment rate in new drilling is below 40% of their operational cash flows – it has been on a decline since Q1 2012. Rising inflation is hitting shale producers too – and they are in no hurry to turn up the taps. US stockpiles of Strategic Petroleum Reserves have dropped to 226.7mn barrels (12.1mn below 2022’s level) so these will have to be replenished very soon. The immediate rise in oil price had a knock-on effect with gasoline prices. Although the US produces 12.5mn bpd (January), it consumes 20.28mn bpd and therefore remains a net importer. All this adds up to one thing: the recent respite in headline inflation could be quite temporary!
Lastly, this week has seen the much-awaited labour data in the US. We have had (1) the JOLTS (Job Openings & Labour Turnover Survey) data; (2) the weekly jobless claims count and (3) March’s Non-Farm Payrolls (NFP) print. First up was the JOLTS data (Tuesday) which showed Feb job openings dropped -632,000 to its lowest in two years of 9.931mn. Jan data was also revised lower to 10.56mn (from 10.8mn). Job layoffs dropped -215,000 to 1.5mn while voluntary quits rose 146,000 to 4.0mn. On the face of it, these numbers suggest a cooling in the job market – a positive for the Fed. Next up was Thursday’s weekly Jobless Claims count. Despite an adjustment of +48,000 for prior years revisions and new seasonal factors (such as pandemic related distortions that kept claims low despite high-profile layoffs in tech and interest rate-sensitive sectors), jobless claims still dropped -18,000 to a new setting of 228,000. The weekly claims number reflects a very current picture of the labour market given its frequency. On Friday, we had the all-important March NFP data print. This came in at +236,000 for March, roughly in line with estimates and so triggering much talk that Fed policy is working, I think one has to be careful in drawing early conclusions. Part of the slowdown in hiring was due to the stronger than expected prints in Jan and Feb due to unseasonably mild weather. The unemployment rate dropped a tick to 3.5% (from 3.6%) while the participation rate improved to 62.6% (from 62.5%). Average hourly earnings gained 0.30% m/m to 4.2% y/y.
So what does one make of the above? At this stage, not much! It is hardly compelling evidence of cooling induced by Fed policy. All three data releases coincide with (1) weather related issues and (2) the unease, left by recent banking events in March, that have far from disappeared but, instead, merely parked for now. That’s evident in the performance of the Bank indices which have barely moved while the rest of the market is flying. Furthermore, March’s NFP is a good number. For reference, roughly 100K jobs per month are required for the economy to keep pace with the growth in the working-age population. Currently, the US is averaging way more – so you can see why there is an acute shortage of workers. The actual job creation is sucking out vastly more than the economy can spare. Over one million jobs have been created over the last three months alone. That averages to over 350K per month. It’s no surprise job openings have dropped – many employers have simply stopped bothering trying to advertise. They are using other channels for hiring or simply not bothering at all. The most current indicators (= weekly jobless claims + NFPs) remain healthy and confirm hiring via alternative channels. Between now and the next FOMC session, we have plenty more data coming our way - time will tell but, for now, the Fed has been given a breather.