By Jane Foley, senior FX strategist at Rabobank

A Year On

Israel today marks the first anniversary of the attack by Hamas. Around 1,200 people were killed on that day and around 250 hostages were taken, some of whom remain in captivity.  In the ensuing assault on Gaza, tens of thousands have died, according to Palestinian officials, and the world continues to live in the shadow of fear of an escalating regional conflict. The BBC is reporting this morning that Israel’s raids into Lebanon appear to have intensified.  Yesterday, Israel’s defense minister was reported as stating that the country’s response to last week’s Iranian missile attack on Israel would come “in the manner of our choosing, at the time and place of our choosing” adding that "at the moment, everything is on the table."

Spoke with Israeli Defense Minister Yoav Gallant today and asked about retaliation plans to the Iranian ballistic missile attack. I asked specially about oil infrastructure, nuclear sites, etc.

“At the moment, everything is on the table," he told me.

— Trey Yingst (@TreyYingst) October 6, 2024

As the market continues to await Israel’s response to last week’s Iranian missile strike, oil prices have edged below Friday’s highs. Last week’s spike in Brent prices was the largest since January 2023 as concerns about Iranian involvement in the conflict sparked concerns about potential supply issues.  Reports that Iran has re-directed oil shipments to China because of Western sanctions means that any impact on the oil price from tomorrow’s re-opening of Chinese markets will be watched carefully. Chinese markets have been closed for a week-long holiday since October 1. Notwithstanding further signs of escalation in the Middle East conflict, risk appetite was buoyed on Friday by signs of continued resilience in the US economy.

Friday’s US labor report put paid to US recession fears and most remaining hopes that the Fed could follow up September’s rate cut with another 50 bps move next month. US equity indices closed in the green on Friday, though futures have moved lower this morning. The Bureau of Labour Statistics reported that 254K jobs were created in September well above the 150K market consensus.  Additionally, the unemployment rate ticked lower to 4.1% while average earnings reported a stronger than expected 0.4% m/m increase. The earnings component was interesting considering Fed Chair Powell’s August statement that “it is unlikely that the labor market will be a source of elevated inflationary pressure any time soon.” This had been interpreted by the market as meaning that inflation risks were no longer the focus of policymakers and attention had been firmly switched to the labor component of the Fed’s dual mandate.

Not all Fed officials share Powell’s confidence on the inflation front. Bowman recently commented that price pressures remain “uncomfortably above the committee’s 2% goal” while Barken repeated that it was too early to declare victory on inflation. Indeed, last week’s rise in oil prices, if sustained, would bring a fresh inflation risk. That said, Friday’s reopening of East Coast and Gulf Coast ports (at least for now), does remove another potential inflation shock.

Both Treasury yields and the USD rose to their highest levels since August on the back of Friday’s payrolls report as market expectations switched to a more moderate pace of Fed easing in the coming months. The confluence of both economic and geopolitical news meant it was difficult to assess with precision how much of the move may have been related to safe-haven demand. Even so, the market is facing the next round of US data with far more confidence about the relative strength of the US economy.