Jobs and oil dominate as ports strike ends

A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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Wall Street has weathered an edgy start to the final quarter reasonably well this week, with the September employment report now an obvious final hurdle on Friday and firmer oil prices an irritant even as a three-day U.S. ports strike ends.

As has been the case for weeks, markets are trying to find the balance between signs of persistent growth but at a pace soft enough to sustain disinflation and Federal Reserve interest rate cut hopes.

Labor market soundings so far this week certainly support the former, though brisk job growth and the relatively modest oil price pop on Middle East tensions raised some questions over Fed easing speculation.

At least the threat that this week's ports strike may feed retail price rises looks to have been averted. U.S. East Coast and Gulf Coast ports began reopening late on Thursday after dockworkers and port operators reached a wage deal to settle the industry's biggest work stoppage in nearly half a century.

A Wall Street sign is pictured outside the New York Stock Exchange, New York City, U.S., April 16, 2021. REUTERS/Carlo Allegri

At least the threat that this week's ports strike may feed retail price rises looks to have been averted. U.S. East Coast and Gulf Coast ports began reopening late on Thursday after dockworkers and port operators reached a wage deal to settle the industry's biggest work stoppage in nearly half a century.

As Chicago Fed boss Austan Goolsbee pointed out on Thursday,  retailers and manufacturers had stockpiled about two weeks worth of items in anticipation of the strike and that should be sufficient now the dispute has ended.

This week's crude oil price rise, aggravated by comments from U.S. President Joe Biden on Thursday that Israeli retaliation against Iran's rocket attack could target Tehran's oil facilities, has become a more unpredictable prospect as nerves about weekend events may keep traders on tenterhooks.

Still, despite this week's jump in crude prices, oil prices are only back to where they were a month ago and continue to track annual declines of more than 10%. U.S. retail gasoline prices remain close to eight-month lows.

And so the scene is set for the September payrolls report later on Friday, with consensus forecasts for another 140,000 new jobs last month - close to August's tally - and an unemployment rate steady at 4.2%.

Most of the week's labor updates - private sector payrolls, jobless claims, vacancies and layoffs data - show the jobs market remains in relatively rude health.

So for all the cross-currents this week, the S&P500 has lost little more than 0.5% so far and futures are higher into Friday's open. Implied volatility captured by the VIX index, however, remains elevated at about 20.

The shifting rates picture and background geopolitics is trickier for Treasuries, where 10-year yields have pushed up a net 5 basis points this week to 3.85% - but held close to Thursday's close overnight.

Fed futures pricing, with just 66bp of rate cuts now pencilled in by yearend, is leaning towards two further quarter-point Fed rate cuts this year rather than one of those being another 50bp move.

The dollar has been the big winner all week, not least as central banks around the world turned more dovish on their interest rate signalling just as Fed expectations ebbed.

But the greenback retreated slightly on Friday, partly as sterling  clawed back some of the heavy losses suffered when Bank of England governor Andrew Bailey talked on Thursday of more "activist" and "aggressive" BoE easing. 

Bailey's comments were dampened on Friday by his chief economist Huw Pill, who said "it will be important to guard against the risk of cutting rates either too far or too fast."