Key Points
- Non-farm employment jumped by 178,000 in March, well above the expected 60,000.
- The unemployment rate declined to 4.3%.
- Growth in aggregate hours worked, however, slowed to 0.4% over the past year.
- The ISM Manufacturing Prices index jumped to 78.3%, warning of a price shock.
- Aluminium prices soared to nearly $3,600/tonne due to supply shortages caused by the war in the Persian Gulf.
- Brent crude closed the week at $109 per barrel, with no end to the Iran war in sight.
The BLS reported a 178,000 increase in non-farm payroll in March, well above the 60,000 forecast. Employment growth has been erratic, averaging less than 15,000 over the past 6 months.
The unemployment rate fell to 4.3% in March, confirming the recent decline in continued claims.
However, average weekly hours worked declined to 34.2 hours. Employers cutting working hours is normally a precursor to cutting jobs.
Growth in aggregate weekly hours worked slowed to a glacial 0.4% over the 12 months to March, indicating that real GDP growth (2.0% p.a.) will likely slow in the first quarter.
Temporary employment, a leading indicator of economic growth, edged up to 2.475 million, but the strong downtrend warns of a recession.
Average hourly earnings grew at an annual rate of 3.7% over the past 6 months, up from 3.6% in February, indicating continued inflationary pressure.
Crude Oil
Brent crude closed the week at $109 per barrel. A breakout above $111 would offer a target of $120.
From CNBC:
Asia and to a lesser extent Europe are more immediately exposed to disruptions in supply from the Strait of Hormuz. Unlike the U.S. — as Trump has repeatedly pointed out — they buy directly from the Middle East. But all of these commodities are connected through global markets. Disruptions in one part of the world will quickly spread to others. Analysts fear the price of oil could jump above the record near $150 a barrel set in July 2008 during the Great Recession.
So far, the world has benefited from energy supplies that were already in transit when the war began just over a month ago, aided by emergency releases from strategic petroleum reserves. But the world is burning through those supplies.
“With even the modest estimates we have now, the loss of oil in April will be twice the loss of oil in March,” International Energy Agency Executive Director Fatih Birol said on a podcast released Wednesday.
CNN reports that Iran still has extensive missile and drone capabilities, allowing it to threaten shipping traffic in the Strait of Hormuz:
Roughly half of Iran’s missile launchers are still intact and thousands of one-way attack drones remain in Iran’s arsenal despite the daily pounding by US and Israeli strikes against military targets over the past five weeks, according to recent US intelligence assessments, three sources familiar with the intel told CNN.
“They are still very much poised to wreak absolute havoc throughout the entire region,” one of the sources said of Iran.
The US intelligence assessment total may include launchers that are currently inaccessible, such as those buried underground by strikes but not destroyed.
Thousands of Iranian drones still exist — roughly 50% of the country’s drone capabilities — two of the sources said the intelligence indicated. The intelligence, compiled in recent days, also showed a large percentage of Iran’s coastal defense cruise missiles were intact, the sources said, consistent with the US not focusing its air campaign on coastal military assets though they have been hitting ships.
Former CIA Director Bill Burns, in a Foreign Affairs podcast on Thursday:
Tehran “is going to look to maintain the leverage that they have rediscovered by disrupting traffic” through the Strait of Hormuz.
Iran will look to use its ability to throttle the waterway to win “long-term deterrence and security guarantees” in any peace deal with the U.S. and to gain “some direct material benefits” like charging passage fees to fund its post-war recovery.
“That sets up a really difficult negotiation right now.”
Financial Markets
The S&P 500 is testing resistance at 6600, buoyed by White House messaging that the Iran war is almost over. Follow-through above 6600 would be a bullish sign, but conflict in the Persian Gulf is expected to weigh on the global economy for the rest of the year.
The Chicago Fed National Financial Conditions Index increased to -0.434 on March 27, indicating tighter financial market conditions. NFCI values below -0.40 indicate stimulative monetary policy, while values above zero are restrictive.
Bitcoin1 is testing support at 64,000. A breach of support would signal another liquidity contraction, likely to weigh on stock prices.
10-year Treasury yields are testing support at 4.3%. Respect of this level would be bearish for stocks, confirming our short-term target of 4.65%.
FT reports that foreign central banks are selling US Treasuries in the wake of the Iran war:
“The foreign official sector is selling Treasuries,” said Meghan Swiber, a US rates strategist at Bank of America.
Brad Setser, a senior fellow at the Council on Foreign Relations, who studies foreign holdings of Treasuries, said oil importers such as Turkey, India and Thailand are probably among those selling Treasuries as they pay higher prices for oil, which is denominated in dollars.
Turkey’s central bank has sold $22bn of foreign government securities from its foreign currency reserves since February 27, the day before the attacks on Iran were launched, according to official data. Setser said a significant portion of these securities were likely to be Treasuries.
Separate data from Thai and Indian central banks show that foreign exchange reserves have been sold since the start of the war in Iran, though whether that represents sales of Treasuries or of dollar deposits is unclear.
“A number of countries . . . don’t want their currencies to weaken further because it pushes up the local currency price of oil — and either means more fiscal subsidies or more pain for households. Hence the widespread decision to intervene in the currency market to try to limit depreciation and higher local currency oil prices,” Setser said.
ISM Manufacturing
The ISM Manufacturing PMI improved to 52.7% in March, signaling continued expansion.
However, the Manufacturing Prices index climbed to 78.3%, warning of a price shock that will likely boost consumer price inflation in the months ahead.
Gold
Gold is edging upward. A retracement that respects new support at $4,600 per ounce would offer a target of $5,000.
Base Metals
Aluminium prices are soaring due to supply shortages caused by the war in the Persian Gulf.
From Reuters:
The Iran war has exposed the fragility of the Western aluminium supply chain. The Gulf accounts for around 9% of world smelting capacity and 18% of global exports outside of China.
The initial impact was a logistics squeeze caused by the effective closure of the Strait of Hormuz. Both Qatari smelter Qatalum and Aluminium Bahrain (Alba) reduced operating rates to preserve raw material stocks.
Then came the direct strikes. Alba was targeted by Iranian missiles and is now down to 30% capacity, while the giant Al Taweelah smelter, operated by Emirates Global Aluminium, is completely out of action after damage to its power plant, according to consultancy Wood Mackenzie.
It’s a crisis that no one saw coming, and the shock waves are running down the supply chain.
In sharp contrast, copper is in a downtrend, with demand expected to fall as the global economy slows. Respect of resistance at 12,500 would confirm the downtrend.
Energy Alternatives
Uranium recovered above support at $85/lb, suggesting another test of $90 as Japan plans to bring mothballed reactors onstream to alleviate the LNG shortage.
Electric vehicle demand is growing, and Lithium has formed a large triangle around $24/kg. An upward breakout would signal another advance with a target of $30.
Critical Minerals
Neodymium (Nd) prices have been in a strong uptrend since China restricted exports. Nd is used in the manufacture of rare-earth magnets for defense, robotics, and electric-vehicle applications.
Gallium (Ga) is another critical material facing export restrictions. Ga is a byproduct of aluminium manufacture, used primarily in high-speed semiconductors, aerospace applications, and medical imaging.
Conclusion
The BLS reported an increase of 178,000 jobs in March, but the past 6 months have averaged fewer than 15,000 jobs. Also, annual growth in aggregate weekly hours worked slowed to 0.4%, and temporary employment remains low, indicating poor economic growth.
Brent crude is headed for another test of $110 per barrel, with oil shortages expected to worsen in April as the Strait of Hormuz remains closed.
Crude is not the only commodity facing shortages. Aluminium prices have soared after Iranian drone attacks damaged smelters in Qatar and Bahrain. Chinese export restrictions have also created supply shortages of critical materials such as rare earths, gallium, and germanium.
Demand for Lithium and uranium is also rising due to shortages of crude oil and LNG.
The ISM Manufacturing Prices index jumped to 78.3% in March, signaling a price shock amid rising commodity prices. A similar jump in the ISM Services sub-index would strengthen the signal.
Tightening liquidity in financial markets is a bearish sign for stocks, and 10-year Treasury yields respecting support at 4.3% would strengthen the signal. Upward pressure on Treasury yields has increased as foreign central banks sell reserves to support their currencies.
Gold is retracing to test support at $4,600 per ounce. Respect would offer a target of $5,000 per ounce, but we expect prices to remain rangebound until conflict in the Persian Gulf is resolved.
Acknowledgments
Notes
- Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
