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Key takeaways

A big week for economic data delivered signs that (as intended) the US central bank’s restrictive policies may be showing up in the real economy.

  • The latest US jobs market report showed that central bank policies are beginning to feed through into real data. Job creation slowed in March, with the number of new job openings falling below 10m for the first time since May 2021. However, unemployment levels also fell, and the participation rate (people joining the workforce) rose. This was a mixed message for the US Federal Reserve Bank (Fed), which is looking (and hoping) for signs of slowing economic activity as a means of bringing inflation to heel. Despite some nascent signs of weakening in the jobs market, the picture is likely not yet weak enough for Fed policymakers to step back from their interest rate rise agenda.

  • Meanwhile, the latest private sector survey data (the ISM Manufacturing Index) showed that the US manufacturing sector continues to contract, and by more than anticipated. The data for March reached its lowest reading since May 2020 (a period of manufacturing shutdowns). This should be welcome news for Fed officials, and their aforementioned efforts to control inflation by reducing economic activity.

  • In commodity markets, the oil price continued to rally, thanks to production cuts announced by OPEC (the Organization of the Petroleum Exporting Countries) just over a week ago, which will restrict the supply of oil. We believe this was likely a pre-emptive move from OPEC, foreseeing slower economic growth (and therefore lower demand for oil) in the second half of 2023, and therefore looking to prevent excess oil inventories from being built up in the meantime. Besides weaker manufacturing signals in the US, there are also signs of production slowing in China and India.

  • Against this backdrop, some areas of financial markets are predicting rate cuts in the coming year. However, a number of Fed officials have recently spoken publicly, and have indicated their preferences for keeping the bank’s policies in restrictive territory (i.e. keeping interest rates high). They’ve made it clear that they don’t expect to cut rates at all in 2023.

Market moves

  • Bond prices rose (and bond yields, which move in the opposite direction, fell) in response to signs of weakening US economic data, anticipating a forthcoming end to US interest rate hikes.

  • Most major stock markets had a largely negative week, though the UK was bolstered by the performance of oil companies listed on the UK stock market.

  • The oil price enjoyed a strong week in an otherwise poor 2023, following news of production cuts (i.e. restricted supply).

What to look out for this week

  • The latest US inflation data is due for release this week, and could have implications for what markets expect the Fed to do next.

  • A new corporate earnings season begins at the end of the week, with large US-listed companies announcing their results for the previous financial quarter, and updating investors on their outlook for the period ahead. The season begins as usual with updates from large US banks.

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