All eyes on US NFP: If it prints hot, we could be in for another round of bruising conditions

Markets

US equities were weaker Thursday, with S&P down 1%. US10yr yields are up 7bps to 3.82%, and Oil is another 1.6% higher following Wednesday's OPEC production cut.

Hawkish comments from central banks overnight have further weakened optimism that has crept into equity markets in the first half of the week.

Indeed, the pivot party gang dialled down their new-found enthusiasm overnight after hawkish central bankers expressed concerns over sticky inflation. The latest ECB minutes reveal deep worries about skyrocketing consumer prices. Members fear it could remain at exceedingly high levels, and tackling it is a priority, even if that means slower growth. While Bank of Canada Governor Tiff Macklem said more rate hikes would be needed to curb "hot inflation," adding that the bank has not seen evidence that underlying inflation has come down and domestic inflationary pressures persist. 

And for a further dose of hyperinflationary reality check, in her first official speech, Fed Governor Lisa Cook joined the FOMC inflation fighting crusade, saying the Fed is likely to keep policy restrictive "for some time" and remains critical to stopping "inflationary psychology" from taking hold.

But making matters worse for investors is the outsized cut in crude oil production by OPEC+ members, which complicates the 'peak inflation' narrative the market has been running with as strategists revise their crude price targets higher.

Adverse developments in the global economy and fragile market conditions do not seem to deter central bankers even as they glimpse into the upcoming northern hemisphere winter, which is bound to be one of despair amid the ongoing energy crisis in Europe and elsewhere.

Multiple Asian equity index futures are pointing to a weaker start. 

If IMF comments are correct, we are headed for a global meltdown, with $4 trillion in lost output over the next three years.

If NFP prints hot, we could have another round of bruising conditions.

Buckle in. It could be a bumpy ride in New York later.

Oil

Bullish momentum continues to build in the oil path, which will trigger a call to action from the Whitehouse and the Fed. Policy measures may slow the rally but will unlikely dissuade oil traders from testing Brent $100 in the distant future.

OPEC's extraordinary production cut supported prices and provided a solid price plank for traders to springboard on dips. More critical is the bullish signal OPEC+ sends here by responding to short-term market dynamics and trying to stabilize or raise prices despite the medium view that demand growth will outpace supply growth, especially when China fully reopens.

Gold 

With central bankers doggedly sticking with their higher inflation, higher rates narrative, a convincing push higher on gold could be a little further off. As the fed pivot appears to be more of a pipe dream at this stage, I would expect more bottoming rather than topping.

There are plenty of reasons for caution play for a Fed pivot: Fed officials have been reinforcing their hawkish messaging and have warned against expectations of a rate cut. And with the outsized cut in crude production complicating the peak inflation narrative, gold likely comes at lower levels next week.

Forex

USD was better bid Thursday as risk sentiment took a southern turn. In G10, weak European PMIs mid-week has been a sour patch for EURO bulls as the Fed continues to beat the " higher of longer" drum.

The Bank of England is scheduled to end the current Gilt backstop on October 14 and sell bonds in November. The hurdle is high for the BoE to extend the backstop beyond October 14 and postpone the start of gilt sales beyond November 1. That means there is an increased risk of a renewed heavy selloff in Gilts and sterling.

Hence the door is open for FX traders to price a lose-lose situation for the Bank of England. Any sign of extending Gilt purchases and postponing Gilt sales under QT would run serious credibility risks, and if they stick with the current plan, yields explode. Either way, sterling will pay the price unless the government completely back-peddles on fiscal.