Wall Street sees light at the end of the Fed rate hiking tunnel and the scramble to pick up stocks is on. Investors are growing confident that the peak in rates was made last week. Stocks are posting the best two-day rally as Fed rate cut bets are also back on the table for next year and given markets were extremely oversold at the end of September.
Jolted
The labor market is starting to lose its tightness. The August Jolts report showed job openings posted its first significant decline, which could be the start of data points that is needed for the Fed to pivot from their aggressive tightening stance. In August, job openings fell by more than 1.1 million, which brought the total number of available positions to 10.05 million. It looks like the ultra-tight labor market is finally showing chinks in the armor.
It is too early to say a Fed pivot is justified but if we continue to see a couple sharp drops with job openings, that will wake up the doves in the FOMC.
RBA Downshift
A dovish RBA hike has traders betting the Fed stance will soften soon. The RBA stunned markets with a 25bp rate hike. Expectations were for a half-point rate increase and now many traders think this could be an outlier that makes other major central banks consider a slower pace of tightening.
The volatility after the RBA decision was intense, as the three-year bond yield had its biggest plunge in 14 years.
Oil
Crude oil prices extended gains after reports that OPEC+ is considering slashing output as much as 2 million bpd. Delegates also said that the impact on global supply could be smaller. With OPEC+, we have grown used to under promise and overdeliver. The Saudis run this show and they know oil prices are at a make-or-break level. Expectations were high that a significant reduction of output would be the outcome, now it seems it might be twice as large.
Oil prices were already headed towards $100 and it looks like OPEC+ just transferred from the local train to an express one. The oil market is going to remain tight all winter and it seems energy traders are confidently expecting prices to be supported. A couple of the recent bearish drivers that include weaker Chinese economic activity and the Biden Administration use of the Strategic Petroleum Reserve (SPR) are about to turn positive for crude.
Gold
A peak in rates is music for the yellow metal's ears. Gold is now comfortably above the $1700 level after the RBA surprised markets with a smaller-than-expected 25-point interest-rate hike. The RBA set the tone and now a lot of traders on Wall Street are expecting the Fed to soften their tightening pace.
Gold’s bottom is in place now that the US is showing clear signs the labor market is softening. The key for gold will be the nonfarm payroll report. As long as we don’t see an extraordinary strong print, gold should remain supported here and poised to test the $1750 region.
Crypto
The October risk rally continues and is pushing up crypto as investors grow optimistic peak rates are behind us. Bitcoin now above the $20,000 level is welcome news for the cryptoverse. Still below the $1 trillion market cap, crypto is making a strong move here and that could continue if risk appetite remains healthy.