Oil down 3rd day on anxiety over upcoming U.S. jobs data, rate hikes

By Barani Krishnan

Investing.com -- In theory, oil should be having a neutral week at least after supportive  inventory numbers for U.S. crude. But that isn’t happening because there’s something even greater: the economy.

Crude prices settled down a third straight session on Thursday amid anxiety over what February’s nonfarm payrolls growth will be in a Labor Department report due Friday. The bigger the growth in the so-called NFP, the higher chance of the Federal Reserve imposing a 50-basis point rate hike when it meets on March 22. Previously, the March increase was expected to be just 25 basis points, or half as much.

New York-traded West Texas Intermediate, or WTI, settled at $75.72 per barrel, down 94 cents, or 1.2%, after a compounded drop of 4.7% over the past two sessions. 

London-traded Brent crude settled at $81.59, down $1.07, or 1.3%. The global crude benchmark fell 4.1% in two previous sessions. 

“The financial world is consumed with inflation worries as the U.S. 2-Year yield spikes to 5.06%,” economist Adam Button said in a post on the ForexLive forum. 

“A year ago today, WTI crude oil closed at $123.70, which is the highest dating back to 2008. From the $130.15 peak, it's down 41%.”

Nonfarm payrolls growth for last month was the strongest since July 2022, when the Labor Department reported jobs creation at 528,000. Economists polled by U.S. media had only forecast a jobs growth of 188,000 for January. The outperformance pushed down the unemployment rate to 3.4% from December’s 3.5%.

For February, bets are that payrolls expanded by a relatively modest 205,000, though the stupendous jobs growth of the past few months suggests that the number could be higher.

The Federal Reserve has said that a labor market slowdown will be necessary to cool inflation that proved more stubborn than thought.

While policy-makers the world over typically celebrate on seeing good jobs numbers, the Fed is in a different predicament. The central bank wishes to see an easing of conditions that are a little “too good” now for the economy’s own good — in this case, unemployment at more than 50-year lows and average monthly wages that have grown without stop since March 2021. 

Such job security and earnings have cushioned many Americans from the worst price pressures since the 1980s and encouraged them to continue spending, further feeding inflation.

Economists say monthly jobs numbers need to grow meaningfully below expectations to create some ding at least in employment and wage security which the Fed suggests are its biggest two headaches now in fighting inflation. 

Inflation, as measured by the Consumer Price Index, hit a 40-year high of 9.1% in the United States during the year to June. It has moderated since, to an annualized growth of 6.4% in January, but remains well above the Fed’s target of just 2% per year.

“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Fed Chair Jerome Powell said in testimony before the U.S. Congress this week. “Recent economic data, particularly inflationary pressures, have been stronger than expected.”

To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March last year via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020. 

The Fed’s first post-COVID hike was a 25-basis point increase in March last year. It then moved up with a 50-basis point increase in May. After that, it executed four back-to-back jumbo-sized hikes of 75 basis points from June through November. Since then, it has returned to a more modest 50-basis point increase in December and a 25-basis point hike in February.

The Fed-funds-futures — which serves as a barometer for upcoming rate decisions — has priced in a 50-basis point hike for March 22, when the central bank is to decide on rates again. Prior to that, the Fed had been expected to adopt a hike of just 25 basis points.