The turmoil in global markets caused by surging bond yields has been partly offset by falling oil prices. However, all eyes are now on the U.S. employment report for September, which will likely dictate market direction.
Oil prices struggled to gain ground on Friday, heading for their worst week since March. Concerns about weakening demand, driven by rising interest rates and unsettled stock markets, were exacerbated by a partial lifting of Russia’s fuel export ban.
U.S. crude oil prices have fallen nearly 9% this week and have dropped by almost 14% from last week’s high above $95 per barrel. The year-on-year oil price is also declining, tracking a 5% loss.
While falling oil prices provide relief in terms of inflation, concerns about global economic growth, partly due to rising borrowing costs, have led to a retreat in commodity prices overall. Copper prices hit their lowest levels of the year, and core commodity indexes are back at August levels.
The bond market has seen two-year U.S. inflation expectations drop about 30 basis points to approximately 2.13% in the past two weeks, aligning closely with the Federal Reserve’s target.
The future demand outlook will depend on the critical U.S. employment report for September, set to be released later on Friday. A slight slowdown in monthly payroll growth to 170,000 and a decrease in the jobless rate to 3.7% are expected.
The recent soft private sector payrolls data from ADP was countered by other indicators showing modest weekly jobless claims, relatively contained layoffs in September, and a rebound in job openings in August.
The latest comments from the Fed suggest that the rapid rise in Treasury yields to near 5%, a 16-year high, may have achieved the type of additional credit tightening that could negate the need for another Fed policy rate hike. San Francisco Fed President Mary Daly mentioned that with monetary policy “well into” restrictive territory and Treasury yields so high, the central bank may not need to raise rates further.
U.S. bond yields remain relatively calm ahead of the jobs report, with ten-year yields hovering around 4.75% on Friday.
The situation also has implications for fiscal policy, with U.S. government shutdown risks looming next month. The appointment of a new House speaker by Republicans after Kevin McCarthy’s removal complicates the situation, making congressional compromises to avert a shutdown less likely.
Janet Yellen’s trip to the annual International Monetary Fund and World Bank meetings in Morocco next week will take place against the backdrop of this fiscal uncertainty and the potential economic impact of furloughing government workers.
In corporate news, Tesla shares fell premarket after the electric vehicle giant reduced prices for its Model 3 and Model Y vehicles in the U.S.
Additionally, Exxon Mobil is reportedly in advanced talks to acquire Pioneer Natural Resources in a deal that could value the Permian shale basin producer at about $60 billion.
