Inflation, Crude Oil and Nonfarm Payrolls in Focus

Last week, on Wednesday, the Federal Reserve (Fed) published the minutes from their November meeting. Despite a decidedly hawkish press conference from Fed Chair Jerome Powell at the time of the November’s rate hike, the minutes struck a far more dovish tone.

Evidently, a “substantial majority” of the Fed’s FOMC agreed that it would soon be appropriate to slow the pace of interest rate increases.

Earlier this month, inflation in the US was reported at 7.7%, down from 8.2% the previous month, which prompted speculation that US inflation may have peaked. Consequently, after four consecutive rate hikes of 75 basis points, the markets now widely expect the Fed to raise rates by a lesser 50 basis points at their next policy meeting in December.

The reaction in the markets to the Fed’s minutes was predictable. Wall Street rallied on the day whilst the US dollar moved in the opposite direction, as investors anticipated more restraint from the Fed going forwards. However, as the markets reopened following their Thanksgiving hiatus, the S&P 500 and Nasdaq Composite slipped slightly, but the three benchmark indices closed the week with gains.

Meanwhile, oil prices continued their recent downward trajectory. Brent ended Friday with a weekly loss of 4.2% whilst WTI was down 4.4% for the week – with both benchmarks languishing at their lowest levels since January 2022.

Whilst this might be good news for global inflation, which has been exacerbated by high oil and gas prices, the recent weakness is largely indicative of a worsening economic outlook and yet another signal that the global economy appears to be sliding into recession.

But enough of last week. What about this week? In the following sections, we will highlight a few events in the financial calendar for the week ahead and what they could mean for traders and investors.

Eurozone Inflation

Although slower to start than the Fed and the Bank of England (BoE), the European Central Bank (ECB) has delivered record-breaking back to back 75 basis point rate increases.

On Wednesday, at 10:00 GMT, the eurozone will release its latest inflation data, and we will learn whether the ECB’s measures have borne any fruit.

Inflation in the eurozone was recorded at 10.6% in the 12 months leading up to October 2022, up from 9.9% the previous month. It is expected that November’s figure will drop down to 10.4% which, if true, could suggest that eurozone inflation has peaked.

The ECB’s next interest rate decision is scheduled for 15 December and, currently, the market consensus is that, whilst rates will once again increase, the increase will slow to 50 basis points.

If inflation is reported higher than expected, this may fuel speculation that December’s rate hike will be higher than currently anticipated. This is likely to have a negative impact in the European stock market and a positive effect on the euro.

US Crude Oil Inventories

As noted above, after surging to 14-year highs, crude oil prices have been following a downward trajectory since June, despite OPEC+ recently announcing production cuts.

The reason for this downward pressure is mostly a worsening economic outlook. When the economy is contracting, demand for oil inevitably falls, which has a knock-on effect on price. Therefore, anticipating a recession, the market is attempting to factor this potential fall in demand into crude oil prices.

Furthermore, despite recent speculation that China would begin to relax Covid-19 restrictions, a recent surge in Covid cases has triggered the opposite reaction. A swathe of new restrictions have been implemented across the country, including in the capital, Beijing. As China is the world’s largest importer of crude oil, this has exerted significant downward pressure on prices, amidst fears of decreased Chinese demand.

Against this backdrop then, at 15:30 GMT on Wednesday, the Energy Information Administration (EIA) will announce crude oil inventories. This weekly indicator measures the change in the number of crude oil barrels held by US companies, which can have a knock-on effect on prices.

After falling by more than 3.5 million last week, it’s forecast that oil inventories will decline by 1.055 million on Wednesday. If this decline is less than expected, it will suggest weak demand for oil products, which could put further downward pressure on oil prices ahead of OPEC’s next meeting on 4 December.

Nonfarm Payrolls and Unemployment Rate

Last week we learnt that the number of US citizens filing new claims for unemployment benefits increased to a three-month high. Eyes will now turn to November’s all-important nonfarm payrolls (NFP) and unemployment rate, which will be released on Friday.

The nonfarm payrolls are always an eagerly anticipated event in the economic calendar, but they have taken on an increased significance this year amidst the climate of rising inflation and low economic growth.

The nonfarm payrolls show how many jobs were added in the US in the previous month. Despite recording two consecutive quarters of negative economic growth in the first half of 2022, the Bureau of Economic Analysis (BEA) was reluctant to officially declare a recession for a number of reasons, one being the strong labour market in the US. Consequently, investors have scrutinised these numbers to detect any hints of an economic slowdown.

The strong labour market has also encouraged the Fed to be more aggressive with their interest rate hikes; the logic being that, the stronger the labour market, the less concerned the Fed needs to be about inadvertently sparking a recession.

As mentioned in our rather wordy introduction, the market is largely expecting an interest rate hike of 50 basis points from the Fed in December. Given this already marks a significant slowdown from the Fed’s previous hikes, it’s unlikely the nonfarm payroll will cause the market to reassess their expectations downwards, unless the NFP is reported a lot lower than expected.

Regardless of the outcome, as is usually the case with these types of announcements, expect volatility in the financial markets around the time of the release.

Trade the NFP with Admirals!

At Admirals, we host regular webinars covering a wide variety of topics, one of which is the nonfarm payroll! Shortly after the NFP announcement, an expert trader discusses the NFP, its effects on the financial markets and how it can be traded. Click the banner below to see all our upcoming webinars and reserve your place today:

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.