NFP React: Fed bets rise post hot NFP report, stocks lower, oil awaits big week ahead, gold dips, cryptos little changed

US stocks tumbled after the nonfarm payroll report showed the labor market, especially wage pressures, is not cooling quickly at all. ​ Wall Street is scratching its head as a lot of traders expected to see a labor market slowdown accelerate. A headline gain of 263,000 jobs was almost above the most optimistic estimate and the gain with wages was jaw-dropping. Average hourly earnings rose twice a ​ fast as forecast on a monthly basis, which will keep fueling inflationary pressures. ​ ​

Most of the job gains came from the service sector and those jobs don’t go away as quickly as manufacturing ones. ​ The retail space lost 30,000 jobs and transportation and warehousing saw 15,000 few jobs, which was both surprising given the busy holiday time of year that is beginning.

This report doesn’t mean the risks of the Fed raising rates to 6% are back on the table. It might add another 25bp to the February meeting, and it doesn’t change the trend of the data for both labor market and with inflation. ​ Service jobs are going to be hard to bring down, but they should noticeably soften once we get past the holidays.

Oil

Oil prices are poised for a weekly gain as hopes grow China could reopen in a few months and as the US labor market remains strong. ​ Energy traders are probably ready to call this week over as next week will be massive for oil price volatility. ​ The OPEC+ meeting should confirm their commitment to keep prices supported. ​ Many expect OPEC to keep output steady now that this is a virtual meeting, but we can’t rule out that they might want deeper oil output cuts. ​ The price cap on Russian crude oil will draw attention as it could be difficult to enforce. ​ The crude demand outlook could hinge on China and if they continue to soften their covid policy and if their trade data deteriorates more than expected.

Oil initially dipped after an impressive nonfarm payroll report as the dollar rallied strongly. ​ Crude’s fundamentals have started to turn green and if that momentum continues, Brent shouldn’t have trouble getting above the $90 level.

Energy traders will now await the G7 approval now that the EU agreed to cap the price of Russian crude at the $60 a barrel level.

Gold

Gold prices dipped after a shockingly hot nonfarm payroll report brought back the dollar to life. ​ Financial markets had to increase their Fed rate hiking expectations after wages surged in November and a hot headline employment number contradicted the slowdown we saw with ADP and the ISM employment components.

Gold has had a nice rally since early November and profit taking could settle in, but a significant pullback doesn’t seem warranted. ​ The economy is slowing down and inflation should steadily decline here and justify a pause in Fed rate hikes after the first quarter.

Cryptos

Bitcoin dipped after a hot labor market sent Treasury yields higher as Fed rate hike expectations edged higher for the February policy meeting. ​ Crypto traders need to remember that a key reason why crypto has fallen so much over the past year is that inflation was out of control and central banks were motivated to send rates higher which ultimately was bad news for all risky assets. Despite this hot NFP report, the Fed funds terminal rate still probably won’t go much above 5%, so Bitcoin might not be dragged down that much. ​ ​

Over the next several weeks if inflation steadily heads lower and the economy looks like it is doing well, risky assets, which includes Bitcoin, could still rally from here. ​ A full-fledged rally will struggle to take hold until we know the full contagion risk from FTX and if other strains emerge for stablecoins. ​ If Bitcoin does continue to stabilize, upside could be capped by the $21,500 level.

Many investors are on the sidelines and are awaiting to see if we see a retest of the November lows and if a specific catalyst could send Bitcoin below the cycle low (80% from record highs) of $13,789. ​ If that breaks technical selling could get uglier, but something new would need to break. ​

Digital assets will still play a big part of the future, but some investors might hesitate investing in the space until they have a clear outline of the regulatory path. CFTC Chair Behnam’s testimony to congress was a plea to give them more power, but any major decisions will still take months.

Even if crypto headlines improve, Bitcoin should be in for a rough patch here as many investors are still rather downbeat for how risky assets will perform once the economy heads into a recession. ​

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