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Commodities Week Ahead: Oil Back in Inflation Grind as Powell, U.S. Jobs Beckon

Published 03/06/2023, 04:44 AM
Updated 08/14/2023, 06:57 AM
  • Markets face a double whammy of risk from Powell, US jobs report
  • Powell’s Congress, Senate speeches to be watched for cues on economy/inflation
  • For oil, additional uncertainty over China data weighs
  • US jobs report to show gain of 200,000 in Feb vs. Jan’s 517,000; could surprise

Two of the most closely-watched elements in financial markets — the Federal Reserve Chair and monthly US jobs numbers — are both on for this week, putting an additional layer of caution over the trading of stocks to commodities, including oil.

Crude prices retreated in Monday’s early trading in Asia as markets hunkered down ahead of a slew of cues on US monetary policy expected in back-to-back addresses to Congress and Senate by Powell on Tuesday and Wednesday, as well as Friday’s non-farm payrolls report for February due from the Labor Department.

Weighing further on oil was a weaker-than-expected GDP forecast from China that dented some optimism over a recovery in crude demand this year,

The Chinese government said over the weekend that it was targeting economic growth of 5% this year, up from 3% in 2022. But the forecast was regarded as softer than analyst expectations, with ING noting that the government was likely expecting a slowdown in overseas demand for Chinese goods.

The soft outlook for the Chinese economy undermined bets that a recovery in the country will drive oil demand to record highs this year, even as data last week indicated that business activity recovered sharply after the lifting of anti-COVID restrictions.

Crude prices are still riding strong gains from the prior week, following better-than-expected Chinese economic data and shifting bets on the path of US monetary policy this year.

More Chinese data on inflation and trade is due this week, providing more cues on the state of the economy in the world’s largest oil importer.

Said John Kilduff, founding partner at New York energy hedge fund Again Capital:

“Those long oil have bet the house on China demand, and if that narrative doesn’t come through well enough, then we go could back to the lows of the range we’ve been trading in.”

That low could be $73 to $70 for New York-traded West Texas Intermediate, which was at $79.03 a barrel by 02:00 ET (07:00 GMT), down 65 cents, or 0.8%. The US crude benchmark had gained 4.4% last week.

London-traded Brent crude was at $85.10, down 73 cents, or 0.9%. The global crude benchmark finished last week up 3.7%.

Craig Erlam, an analyst at online trading platform OANDA, said in a roundup on oil on Friday:

“Prices have fluctuated in a range for months now, and the current price sits more-or-less in the middle of that range. While traders are becoming more optimistic about the Chinese recovery, the risks to the global economy may be increasing as interest rate expectations have risen.

The range does appear to be gradually tightening but remains quite large, and there appears little appetite for a breakout at this moment in time.”

Powell’s comments to Congress and Senate will be closely followed for hints on whether a larger rate hike is under consideration this month after recent data pointing to still persistent inflation. Powell has said the January jobs report showed why the battle against inflation would “take quite a bit of time.”

Friday’s employment report for February will be the last before the Fed’s upcoming meeting on March 21-22 and takes on extra significance after January’s blowout report prompted investors to reevaluate expectations for the future path of interest rates.

Expectations are for the economy to have added 200,000 jobs last month, moderating from January’s blistering jobs growth of 517,000, while the unemployment rate is expected to hold steady at a more-than-five-decade low of 3.4%.

Another stronger-than-expected report could stoke fears of more hawkish Fed action - strong demand in the labor market bolsters wage growth, which contributes to higher inflation - keeping pressure on the Fed to push rates higher.

The Consumer Price Index, a broad gauge of inflation, hit a 40-year high of 9.1% for the year to June. It has moderated since to an annualized growth of 6.4% in January but remains well above the Fed’s target of just 2% per year.

To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March last year via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020.

The Fed’s first post-COVID hike was a 25-basis point increase in March last year. It then moved up with a 50-basis point increase in May. After that, it executed four back-to-back jumbo-sized hikes of 75 basis points from June through November. Since then, it has returned to a more modest 50-basis point increase in December and a 25-basis point hike in February.

Rate expectations for the Fed’s March 22 policy meeting, monitored by foreign exchange traders, remained largely at 25 basis points on Friday, though that could change with the increasing calls for tighter policing from the central bank’s hawks.

Said Kilduff:

“US jobs numbers have surprised to the upside month after month, and there’s a chance that February could give us another jolt. If that’s the case, rate expectations will be skewed to the upside again, and risk assets will suffer. Oil is certainly not out of the woods.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Latest comments

so investors in hurricanes and the gulf wars don't want to slow down. I hope jerrome will keep kicking them out from the commodities markets
Barani please you stop predicting Oil and Gas. Not a single of your reporting supporting the next session pricing... I have lost everytime I go with your reporting....
 Thanks much for your endorsement, mate, MM.
check the market momentum.alreqdy said it will be negative
Hello, where were oil prices this morning? Did you even check? We were down about $1.50 on WTI before the midmorning rebound, driven by what? Goldman Sachs BS on oil reaching $100 when? in December! That's 9 months away, enough for a woman to deliver. Oil is pretty volatile now because of supply scare more than demand and no one can dispute that. But it's worry of demand that creates the downside and I have been consistently pointing that out. The Fed hike fears got you down $1.50 on WTI this morning, exactly what I've been saying. The GS BS brings it back up and I've articulated that too in my recent weekly review on Sunday. You need to read things in totality and make a call. I appreciate that you were following me but I write for a guide. There are many who write in, saying they benefit from my guides. But you need to look at both sides of the supply-demand equation and move nimbly. Hope that helps.
Oil companies are over-producing again. A sell-off is imminent. Now is a good time to take profits.
Stephanie tabac
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