Written by: Edward Moya | OANDA
Sell in May decided it didn’t need to wait for the Fed. Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon and was ready to focus on the next weakest link, potentially distressed lenders with tremendous exposure to commercial real estate. Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the US could default on its debt next month.
Today’s JOLTS data provided some optimism that the labor market is softening and that could allow the Fed to refrain from remaining aggressive with their rate hiking campaign. The signs for the labor market have been somewhat mixed, but broadly it appears to be softening.
US Data
The labor market is clearly cooling as employers start to pull back job offers and as layoffs rise. The JOLTS reading for March saw job vacancies tumble to 9.59 million jobs, much lower than both the consensus estimate of 9.736 million and upwardly prior reading of 9.974 million. Layoffs rose to the highest levels seen since December 2020, while the quits-rate edged lower to 2.50%.
The labor market has a lot of cracks, but it is still holding up and unless we clearly see the economy in a recession, wage pressures might remain sticky.
Debt Ceiling
Treasury Secretary Yellen wrote, “our best estimate is that we will be unable to continue to satisfy all of the government's obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time.”
Yellen moved the ceiling from June 5th to June 1st. It is four weeks for Congress to get a deal done, which means they probably won’t seriously talk until a few weeks.
This is starting to look like 2011. Republicans have an offer that isn’t even in the ballpark of what will be agreed upon. We will probably see around $500 billion in deficit reduction, which could be what Democrats are willing to give so the debt ceiling can be raised.
Speaker McCarthy agreed to meet with President Biden’s team on May 9th to discuss how a debt limit breach can be avoided.
Oil
It got ugly a lot faster than any oil trader expected. Energy traders were turning constructive, even last week, the recent oil bear, Citi’s Ed Morse said ‘were close to a bottom in oil prices.’ Oil is in the danger zone as the banking crisis is crippling the short-term outlook for the economy and driving fears that we could be recession bound a lot faster.
Oil basically has weakening prospects from the world’s two largest economies, China and the US, and if the macro backdrop deteriorates, momentum selling could easily send prices below the $70 level.
Gold
Gold prices were in the danger zone, but the return to banking crisis fears has triggered a flight-to-safety. We didn’t get a chance to enjoy a short period of calm following the JPMorgan deal for First Republic’s assets. Bond market chaos is seeing yields plunge, which is taking away all the risks of the Fed tightening beyond this week.
Gold will remain a volatile trade, especially if it refuses to take the bait and keep all options on the table for the June meeting. Recession fears are growing and financial stability concerns should give the Fed permission to signal they are ready to pause after delivering one last rate hike. The debate to not even hike might lead some dissents tomorrow, which is something we have not seen.
Bitcoin
Bitcoin is back as banking jitters quickly return. Bitcoin is up 3% on the day, but still seems capped by the $30,000 level. Today’s banking turmoil was somewhat expected to happen over the coming months, not the following day from a massive bank rescue. Bitcoin is becoming appealing again given how bad financials are getting hit.
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