Market Minute: Market Prep for the Week

Labor market data from last week depicted a significant rebound in labor conditions compared to prior months. Non-Farm Payrolls exceeded street expectations by over 100,000 jobs, and this growth was complemented by strong wages, with Average Hourly Earnings rising by 0.4%, which translates into a 4.8% annualized increase if the trend continues. This favorable data allowed the S&P 500 to reverse earlier losses for the week and close in positive territory.

However, the economic data releases don't end there. This week could be called "inflation data week," with the Consumer Price Index (CPI) and Producer Price Index (PPI) reports scheduled for release on Thursday and Friday, respectively. We'll also receive an update from the Federal Reserve with the release of the FOMC minutes on Wednesday. Although many may view these minutes as somewhat outdated, they will provide additional insights into the dissenting vote by Fed Member Michelle Bowman, as well as the growing concerns around labor market weakness.

Energy in Focus

Geopolitical risks in the Middle East will continue to be closely monitored as tensions escalate between Israel and Iran. The market is expecting a response from Israel after Iran launched a multitude of ballistic missiles into Israel last week. Over time, equity markets tend to price in prolonged geopolitical events, but for commodity traders, these developments have led to increased demand for energy products like oil and gasoline. If Iranian oil infrastructure is targeted, depending on what is affected, energy markets could see supply and logistics disruptions, even in a backdrop of decelerating global demand growth.

Currently, crude oil is not experiencing a significant "short-covering" event, which could be another boost for prices, as non-commercial net long positioning approaches near-term lows. For oil bulls, geopolitical risk alone may not sustain higher prices, but if these price advances last long enough for Chinese economic data to show positive effects from recent stimulus announcements, a technical reversal may be imminent. The closely watched 3:2:1 crack spread, which measures the profitability of converting 3 barrels of oil into 2 barrels of gasoline and 1 barrel of diesel, did not improve in the same manner as the energy products themselves last week with only a 0.68% change in that metric. This still puts into question the risk of energy companies readjusting their forward profitability estimates which could result in a rerating lower in equity valuations.

Hurricane season has also been largely overlooked by many energy traders. However, this week there is a forecast of another strong storm potentially hitting the western coast of Florida. The current trajectory of Hurricane Milton does not place many oil and gas rigs in its direct path, but any shift of the storm westward toward Louisiana could significantly increase the risk of damage to oil infrastructure and logistics networks.