Written by Shane Balkham
Iran launched the biggest attack on Israel in over 50 years, coinciding with the eve of the Jewish New Year. This rapid escalation of geopolitical risks in the Middle East saw the oil price climb around 5%, the biggest weekly move in the past 12 months. This surge in oil prices came as markets braced for the possibility that Israel’s retaliation would be focused on Iran’s energy infrastructure.
While oil’s sensitivity to geopolitical risks is nothing new, broad market concerns are focused on whether the conflict will cause a significant interruption to oil supply and have inflationary consequences.
Now that the Federal Reserve (Fed) has started its rate-cutting cycle, the focus for the rest of the year is on data pertaining to the US labour market. The Fed has signalled that its focus has shifted from inflation to the strength of the US labour market. That means the market will give a lot of attention to the Nonfarm payrolls data (a key indicator of the strength of the US labour market), the latest of which was published on Friday.
Good news for Jerome Powell, the chair of the Fed, as the number of jobs created in September exceeded expectations: 254,000 jobs versus the consensus forecast of 150,000. Equally significant was a revision to July’s job figure, up to 144,000 from 89,000, and August’s revision up to 159,000 from 142,000.
Add to this that the headline unemployment rate dropped from 4.2% to 4.1%, which leads to a conclusion that the US looks to have a robust employment backdrop and reaffirms that the US economy remains strong. While the probability of a consecutive half percent rate cut at the Fed’s next meeting has been reduced to almost zero, the expectation of a quarter percent cut in November, just two days after the US Presidential Election, is still firmly on the cards.
In the Eurozone, the focus remains firmly on inflation, with the European Central Bank (ECB) hinting at a rate cut at its next meeting. Inflation for the Eurozone was below expectations on a year-on-year basis, with headline inflation dipping below 2% for the first time since 2021. A decline in energy prices helped bring Eurozone inflation down to 1.8% and should provide comfort to the ECB that further rate cuts are appropriate.
With inflation seemingly under control and the majority of central banks in a rate-cutting cycle, outside of the conflict in the Middle East, the other unknown of 2024 rests firmly with the US Presidential Election. We are only four weeks away from the US electorate going to the polls, and most forecasts continue to suggest a close race.
While the focus will be on who wins The White House, the importance of which party or parties control Congress is arguably just as important. While the President has significant power, Congress will dictate how much legislation can be passed and ultimately how much of an effect politics will have on the US economy.
The importance of having an appropriately globally diversified investment is as strong as ever.
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