Image Source: MARKETSThe S&P 500 soared on Friday after a blowout jobs report sent waves of optimism coursing through the market, quelling concerns about the economy’s health. Nonfarm payrolls jumped by a staggering 254,000 in September, smashing expectations of a modest 150,000 gain. The unemployment rate also dipped to 4.1%, defying predictions it would remain flat at 4.2%. With stocks now flirting with record highs, the market is shaking off recent geopolitical jitters, while U.S. dollar bears were dealt another harsh reality check as 10-year U.S. Treasury yields surged to 4%.Taken at face value, this jobs report was a “home run” for the U.S. economy—impressive job creation, a lower unemployment rate, and solid wage growth. Each beat the consensus forecasts. The message? The labour market isn’t just solid—it’s booming. And that keeps the narrative of U.S. economic exceptionalism alive and well.What does this mean for the Fed? It’s a clear signal to pump the brakes on aggressive rate cuts. The markets might have been forcing the Fed into a corner, but this report could give policymakers the upper hand. Gone are the hopes for a 50-basis point cut in November—traders are now expecting the more measured, steady-as-she-goes quarter-point cut.Of course, all eyes are now on next month’s revisions. There’s already buzz about whether the Bureau of Labor Statistics (BLS) might have overstated the data—especially with election season around the corner. The timing is raising a few eyebrows, with some speculating that government hiring could have given the numbers a convenient boost. And let’s not forget the chatter about Democratic-leaning service sector CEOs ramping up holiday hires earlier than usual. Whether coincidence or calculation, this kind of data drop always stirs much debate.A record 785,000 government workers were added in September, pushing total govt workers also to a new record high
Regardless, the September payroll report slams the door on any larger rate cuts next month, keeping officials on track for a modest quarter-point trim. Last month, the Fed kicked off its easing cycle with an outsize half-point cut, justified by cooling inflation and signs of a slow labour market. But now, with these robust hiring figures, Fed Chair Jerome Powell’s recent warning—“we’re not in a hurry to cut rates”—sounds even more pointed.So, what’s the takeaway? A rate cut into a strong economy is a gift for stocks, and if you’re on the same page as me, the Fed is cutting not just for Wall Street but for Main Street as well. Mortgage applications are stuck at historic lows, and geopolitical risks are still lurking.But make no mistake—another scorching jobs print in November could quickly extinguish any hopes of a December rate cut, turning what could’ve been holiday cheer into a lump-of-coal situation for markets. That would undoubtedly dim the festive lights for anyone banking on a year-end rally!And what about oil? The dollar is still riding the wave of rising crude prices. President Biden’s comment that Israel is considering strikes on Iran’s oil facilities as part of their retaliation strategy has kept oil markets on edge. The assumption was Biden would try to avoid supply disruptions and an oil price shock before the election, so the latest news caught traders off guard.If an Iranian oil facility gets hit, brace yourself for a quick $10 surge in oil prices. What we’ve seen so far could be the tip of the iceberg as bearish traders scramble to unwind their massive short positions. Many in the oil patch are banking on a big oil supply glut next year, and there’s a lot of doubt about whether China’s stimulus will breathe life back into its economy. That setup was my bread-and-butter trade, which we did cut and reverse. But I don’t have the deep pockets to play hedge fund ball over the weekend, so we cut out 80 % mid-day New York and are happy to hold excess long dollar risk over the weekend as our previously expressed go-to hedge against oil price shocks.Volatility is far too high on oil for my liking to hold a make-or-break oil position without a solid escape plan during the weekend, especially if some unexpected détente is reached. Even though oil prices haven’t spiked in moonshot fashion yet, sometimes, you need to hedge with less volatile options to avoid staring down a leaky oil barrel of risk without a way out.It was one of those trades that had me chewing on it until noon in New York, just as oil liquidity typically starts to dry up. (Let’s say last night’s sleep wasn’t exactly restful.) The burning question is: where’s the tipping point for short-covering if we get both a literal and figurative explosion at a key Iranian oil infrastructure site over the weekend? If the fireworks go off, we could see a massive short squeeze that sends the market into a frenzy.Still, short-sellers are sitting in a relatively comfortable spot—they didn’t start averaging in at the bottom of the market, as the more prominent oil players have been riding the short side for a while now. We’d likely need to break through the $80 mark to get tongues wagging. That’s when the real buzz could start. Honestly, I wouldn’t be shocked if we blow past $85 in a flash if things escalate further. And if we crack $90 on full-blown escalation, it’s game on—panic could ripple through the oil pit, and a $100 overshoot on a massive short squeeze might not be out of the question.On the flip side, if the weekend passes without major supply disruptions or a significant flare-up in the Strait of Hormuz traffic lanes, we could see some stress levels drop, giving the market some breathing room.It’s all about risk management. As traders, even if we do not believe a scenario will play out, we’ve been taught to hedge against that sting-in-the-tail risk or the worst-case scenario.But hey, if there’s an overshoot in oil prices, I’m eyeing that opportunity to jump in on a big short. ( read why on my oil commentary below)It’s never just about predicting the future—it’s about being prepared for those unexpected curveballs, like this week’s wild USDJPY flip. In the blink of an eye, tail risk swung straight to 150. Powell came in more hawkish than anyone expected. Ueda leaned hard into the dovish territory, and when you throw in the bearish yen backdrop of higher oil prices—it was like adding jet fuel to the broader dollar rally. In this environment, trading is all about staying nimble and reacting to those sudden shifts that can turn the whole game on its head.AN OIL MARKET IN A STATE OF FLUXThe oil market is riding a rollercoaster of volatility, driven by a potent mix of geopolitical tension, strategic uncertainty, and a slowdown in demand from the world’s biggest oil consumer, China. Right now, three major forces are tugging at crude prices: (1) the rising geopolitical risk premium from the escalating Middle East conflict, (2) the murky future of OPEC+/Saudi Arabia’s production strategy, and (3) a sharp and unexpected slowdown in China’s oil consumption. However, market participants seem laser-focused on the second and third factors shaping global supply-demand dynamics more than the geopolitical flare-up.Despite a missile attack from Iran on Israel, WTI crude has barely budged, hovering around $75/bbl. It seems like traders are banking on the idea that the conflict won’t cause widespread, long-lasting disruption in Middle Eastern oil production, including from heavyweights like Saudi Arabia and the UAE. Even if Iran’s output (3.4 million barrels per day, or 3.3% of global supply) is temporarily knocked offline due to retaliatory strikes, OPEC+’s spare capacity (around 5.5 million barrels per day) can easily pick up the slack. The market is clearly betting that the geopolitical drama won’t turn into an oil shock.But the real danger for crude prices is looming oversupply. OPEC+ seems ready to start reversing its 2.2 million bpd voluntary production cuts come December, which could flood the market with more oil. At its latest meeting, the group hinted that they’re sticking to the plan, meaning cartel output could rise by 205,000 barrels per day each month next year. Saudi Arabia is reportedly twisting arms to make sure non-compliant members fall in line with their quotas, potentially lowering its official selling price to enforce discipline. While there’s still a chance OPEC+ might delay restoring output, the writing is on the wall: global oil supply is set to expand, especially with non-OPEC+ producers like Brazil, Guyana, Norway, and the U.S. all ramping up production.The wildcard here is demand, which has already been weaker than expected in 2024, thanks largely to China’s slowdown. Historically, China’s engine of global oil demand growth has seen consumption growth slump to just 200,000 barrels per day compared to the 600,000 barrels per day it typically adds yearly. This drop is staggering, especially considering the International Energy Agency (IEA) had initially forecasted a 700,000-barrel increase. Is this just a temporary blip or the start of a longer-term trend? The smart money seems to be on the latter, given China’s rapid adoption of electric vehicles (which now make up more than 50% of new car sales) and the expansion of its high-speed rail network. While China isn’t quite at peak oil demand yet, the trend is clear: demand is shrinking faster than anticipated.In short, oil prices are caught between conflicting forces. On one hand, there’s the Middle East powder keg and OPEC+’s shaky production discipline. On the other, a slowing Chinese economy and the looming prospect of global oversupply are casting a shadow over the market. The next few weeks could prove decisive for where oil heads next.NUTS & BOLTSRelying on data is all fine and dandy—until those pesky revisions flip the script and send policy off the rails. At key turning points in the tightening cycle, it’s not uncommon for indicators like inflation and employment to give mixed signals, muddying the waters. Right now, the U.S. economy is knee-deep in one of those periods of uncertainty. That’s why, if it were up to me, I’d have been waving the flag for a more modest quarter-point cut in September. A smaller move could’ve helped the Fed avoid stepping on a policy landmine. But throw in some significant data revisions, and suddenly, the whole inflation-growth narrative can take a wild left turn, complicating the Fed’s next move even more.And if the blockbuster jobs weren’t enough to keep the Fed on edge, commodities have been having a wild run lately. Across the board—whether it’s metals, oil, grains, meats—you name it, prices are up over 10%, and it’s not just one thing fueling the rally. East Coast port strike? Yep. Middle East tensions? Absolutely. But here’s the kicker: could there be more to it than geopolitics? Is demand quietly creeping up while no one’s been paying attention? It’s the kind of curveball the market loves to throw when we’re all too busy watching one side of the field.The U.S. economy is still dropping positive surprises left and right. Financial conditions have loosened up post-rate cuts, mortgage applications have jumped 10% in just a month (though starting from a low base), and equity markets are flirting with record highs. September’s ISM Services index? It’s easily the best we’ve seen since early 2023, with new orders and prices paid blowing past expectations. And next week, CPI and PPI reports are set to drop. While the month-over-month figures are expected to stay mild, year-over-year PPI could come in hotter than anticipated—thanks to some less-than-favourable base effects. And with mixed signals coming from prices paid indexes across services and manufacturing, it’s becoming increasingly clear: this rollercoaster ride has a few more twists ahead, and no one’s quite sure where it’s going.CHART OF THE WEEKGroup rethink sent two-year yields vertical, and watch out for next week’s year-over-year PPI. More By This Author:
