DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange edged lower early Friday after overnight data out of the Eurozone showed inflation across the 20-country bloc returned to single digits at the end of 2022 due to easing gas and oil prices, while investors in the United States await the release of the non-farm employment report for December in search for signs of a cooling labor market.

U.S. economy likely added 200,000 new jobs in the final month of 2022, a modest slowdown from the breakneck pace of job growth over the course of last year, but still robust compared to the pre-pandemic years. Unemployment rate is expected to hold steady for the third straight month at 3.7%.

This week's economic data showed little signs of a slowing labor market. Unemployment claims fell again last week to a near historic low of 204,000, holding below or at the pre-pandemic average of 218,000 for much of the second half of 2022. New job openings in November were little changed from October's 10.5 million, with layoffs and discharges holding steady at 1.4 million. This data aligns with the Institute of Supply Management's manufacturing report released earlier this week that showed the labor market for the industrial sector is solid, with the jobs component rising 3 points to 51.4 in December, indicating expansion. At the same time, the prices index, a gauge of inflation, declined to 39.4, a drop of 3.6 points.

U.S. Federal Reserve has been trying for nearly a year to create slack in the labor market by raising interest rates from zero at the start of 2022 to the current range of 4.25% to 4.5%. The Federal Open Market Committee raised the federal funds rate for the seventh consecutive time in December, trimming the size of the hike to 0.5% from 0.75% seen over the prior four FOMC meetings. The current debate in the markets is whether the Fed's aggressive monetary tightening in such a short period of time will have a cooling effect on the labor market without tipping the economy into recession.

In the minutes released from FOMC's Dec. 13-14 meeting, the summary states, "Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy."

The longer the Fed holds rates at elevated levels, the higher are the chances for recession.

In the Eurozone, the inflation print for the final month of December surprised markets to the downside, easing to 9.2% from November's 10.1%, which could potentially relieve some pressure for the European Central Bank that appeared on course to raise interest rates aggressively in 2023.

Looking at the main components of euro area inflation, energy contributed to the largest drop in overall inflation last month, easing to a 25.7% annualized rate from 34.9% in November. Food, alcohol, and tobacco edged higher to 13.8% from 13.6% in November, non-energy industrial goods posted a 6.4% gain from 6.1% in the prior month, and services increased to 4.4% compared with 4.2% in November. What this might say to the markets is although energy-related inflation is easing, the core service components of the economy are still elevated and likely to remain sticky in 2023.

Near 7:30 a.m. EST, West Texas Intermediate for February delivery softened to $73.40 barrel (bbl), down $0.25, and Brent March futures on ICE declined $0.25 to $78.45 bbl. NYMEX RBOB February contract dropped $0.0145 to $2.2526 gallon, and front-month ULSD futures softened to $2.9655 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com