Oil heads lower after OPEC+ output hike

• Europe on the rise despite Friday’s job report weakness.
• Rate cut expectations rise, lifting gold.
• Oil heads lower after OPEC+ output hike.

European markets are taking a largely optimistic tone this morning, despite the sharp declines seen across US equities on Friday in the wake of a somewhat shocking jobs report. That jobs report not only brought a major miss for the payrolls figure, but the sharp downgrade to both May and June readings thus shifting the narrative around how the US economy was operating under the weight of Trump fuelled uncertainty. For Trumps part he decided to sack the BLS commissioner, with Hassett claiming that the “revisions are hard evidence” that the data was rigged. Markets will be less convinced that is the case, and we will be viewing each piece of US data through the prism of a potential weakening of the economy in the face of huge policy uncertainty and input cost upheaval. Understandably, businesses do not operate with confidence when they are surrounded by huge policy and economic uncertainty. The negativity shown in both manufacturing and services PMI metrics have evidently been right after-all, and thus tomorrow’s ISM services PMI will therefore become an increasingly important indicator for markets.

For markets, Friday brought a huge shift in expectations for Fed easing, with the CME now pricing a 45% chance of three cuts in the remaining three meetings this year (up from 20%). The weakness of the jobs report certainly played a significant role in shifting the market perception, with the Fed now beginning to look like it’s behind the curve as total unemployment pushes up to 7.9%. However, we have also seen a surprise exit from the Fed for Adriana Kugler, who unexpectedly decided to vacate her board of governor’s seat despite it not expiring until January. This hands Trump the opportunity to appoint one of his own to the FOMC, with many speculating that whoever takes on the role would serve as the shadow chair and ultimately take over from Powell in May. From a market perspective, the expectation that we will see a more dovish Fed brings benefits for the likes of gold and weakness for the dollar, with the precious metal gaining over 2% on Friday.

Oil prices slid to a one-week low, weighed down by soft U.S. jobs data and an OPEC+ decision to boost output by 548,000 barrels per day. However, the relatively orderly nature of the decline suggests markets aren't panicking quite yet. Instead, this feels like a period of recalibration, as short-term weakness in demand tallies up with a temporary phase of expansion for OPEC+. While near-term demand looks shaky and supply is rising, the lack of a sharp sell-off hints that traders are already looking ahead to a possible rebalancing in Q4. With OPEC+ likely to pause or even reverse hikes later this year, and the prospect of a US recession looking far-fetched, the current weakness may prove temporary.