Surprise Decline In U.S. Jobs, Surprise U-Turn At OPEC Meeting

Bad news was perceived as good news yesterday, and the US stocks reversed losses on the back of a significantly lower-than-expected ADP report, which showed that the US economy added the lowest number of private jobs since the pandemic recovery began.  

The heavy disappointment in data revived the Federal Reserve (Fed) hawks, and brought forward the idea that the Fed could soften its tightening plans if the economy starts suffering from a tighter policy. But that’s unlikely. The Fed rates are at historically low levels, inflation is at the highest levels in 40 years, and the US employment market has recovered relatively well - the total working hours came just below the pre-pandemic levels in April, and today’s data could even reveal that Americans worked more hours in May than they did before the pandemic started.  

So, the Fed will certainly not change its mind on the soft jobs data. Fed Vice Chair Lael Brainard has been clear that the Fed is unlikely to stop raising rates after the two 50bp hikes expected in the next two FOMC meetings. The era when the Fed threw money to the market to boost jobs is behind. We are in a new era, the era of high inflation, and the soft jobs will hardly stop the Fed from hiking the rates. 

Plus, yesterday’s JOLTS data showed a record number of job openings, meaning that job scarcity is not the problem - which makes the jobs focus even less relevant.  

But, there is one silver lining in the bad jobs data. If jobs recovery and the pay growth slow, households may spend less, and lower spending would have a negative impact on inflation. Yet, lower spending is not necessarily positive for company earnings, and more importantly, inflation mostly comes from the supply side issues; the soaring energy prices due to the Ukrainian war, and the low production and supply chain problems due to the pandemic. Therefore, killing spending should have an easing effect on inflation – this is why the Fed is doing what it is doing – but it could take longer than just a couple of months to see the desired effects. As a result, bad jobs data should keep equities under pressure, which makes the post-data gains much more vulnerable. 

The S&P 500 and NASDAQ recovered to their highest levels in a month yesterday, as the US 10-year yield stabilized just a touch above the 2.90% level. The US dollar index eased, and investors are waiting for the May jobs report to give some more clarity to the jobs situation in the US. The US is expected to have added some 325,000 new nonfarm jobs in May, with a slower pay growth from 5.5 to 5.2%. It looks like a soft NFP figure could be interpreted as 'good news’. But that optimism may not necessarily last long, if other factors like wages growth, and energy prices don’t hint at slower inflation. 

What a surprise! 

OPEC surprised big yesterday, as the cartel announced that it will increase the production target by 50%, to partially make up for oil that Russia won’t pump, as a result of the European decision to ban oil imports from Russia. 

US crude eased to $111 per barrel yesterday but bounced higher on the OPEC decision, as traders were hard to convince that OPEC could boost production that much, due to potential capacity constraints. However, the cartel successfully beat its production target last month, and challenges in countries like Nigeria and Angola may not stop Saudi and the United Arab Emirates from pumping more.  

Dive deeper… 

Yesterday’s decision is a big step for the Saudi-US relationship. The US has been pushing OPEC for months to do something to tame the unbearable pressure on oil prices, and Saudi has been doing nothing as the diplomatic relations have gotten ice cold between the two countries since the murder of Khashoggi in 2018 in Istanbul. Yet, Americans’ growing pains at the pumps encourage Joe Biden to make an effort to improve his country's relationship with Saudi. He's planned to visit Riyadh in the next few weeks. 

So, yesterday’s decision is a sign that the ice between Saudi and the US could finally melt after two years of freezing cold relations – which means that we may be at a political crossroads. If the US could strengthen its ties with Saudi, Saudi would pump more to make up for the lost Russian oil. More oil could slow and ideally reverse the oil rally, ease the inflationary pressures, and even isolate Russia to hopefully change the course of the Ukrainian war.