Cautious Markets React to Disappointing Jobs Data and Oil Inventory Surge

Oil prices resumed their downward trend on Wednesday following the release of employment data from ADP:Job growth was significantly lower than expected, with only 83K jobs added compared to the anticipated 156K. The accompanying commentary was equally disconcerting, highlighting a marked deceleration in job growth throughout September, primarily attributed to job reductions within large enterprises. The market correction gained momentum after the weekly EIA data on oil reserves was made public. These figures revealed a substantial surge in gasoline inventories, registering a substantial increase of 6.4 million barrels, in stark contrast to the forecasted 0.1 million. An uptick in gasoline inventories often signals reduced demand for fuel, a clear economic activity indicator. Within a span of just under two days, oil prices retreated by approximately 7%, breaching a critical upward trend:The tepid yet concerning signal from ADP raised concerns about the recent frenzy within the US Treasury bond market. This frenzy was sparked by the sudden realization of market participants that it may take a long time for high interest rates to do their job of suppressing inflation. In addition to oil, yields on Treasury bonds have also reversed their course, with ten-year bond yields decreasing by roughly 9 basis points to 4.71%.Nevertheless, other economic indicators released in the United States this week continue to point toward significant inflationary potential. The ISM report on service sector activity from yesterday met expectations, with the headline remaining in the expansion zone at 53.6 points. Initial claims for unemployment benefits, released on Thursday, saw an uptick of 207K, slightly surpassing the projected 210K. It is worth noting that the weekly increase in unemployment level tracked by this measure remains close to the lows of the current business cycle, suggesting that the labor market remains robust.The US dollar has also weakened against its major counterparts, although the correction appears to have stalled around the 106.70 level on the dollar index (DXY). The market is likely awaiting the official labor market report, scheduled for release on Friday, to determine direction. However, given the lackluster ADP report, the risks associated with a negative deviation in job growth in the NFP report are increasing. Consequently, we may witness tentative efforts to sell the dollar in anticipation of this risk materializing. In the event of a weak NFP report, there is a strong possibility that the dollar index will continue its descent towards the 106 level on the DXY index, where the lower boundary of the ascending corridor is situated.