Market Briefing: Second Quarter Kicks Off With An Oil Price Bang
Treasury yields are up, equity futures are down, and the dollar is rising on renewed inflation fears this morning, with a surprise cut in global oil production expected to lead to higher prices - and further monetary tightening from major central banks.
Benchmark oil prices gapped more than 8 percent higher at yesterday’s open after OPEC+ exporters unexpectedly announced they would cut production by more than 1.66 million barrels a day. In an official communique, Saudi Arabia called this a “precautionary measure,” meant to stabilize markets, while Russian energy spokesman Dmitry Peskov was more blunt, saying it was meant to keep “crude oil and petroleum product prices at a certain level”. Background reports suggest that recent banking turmoil and weakness in the Chinese demand outlook played a role in prompting the move, but that the Biden administration’s decision not to follow through on a commitment to refilling the Strategic Petroleum Reserve had left the Saudis “irritated”.
If the output reduction succeeds in pushing global prices higher, global progress in bringing headline inflation measures down could slow, and central banks might be forced to adopt a more hawkish approach. But there are important caveats: most major benchmarks will likely remain lower in the year-over-year calculations that drive inflation headlines, OPEC+ output compliance has been weakening in recent months, and demand destruction could grow more powerful as the overall global economy slows, meaning that cost increases might limit consumption growth and crush longer-dated contract prices.
The calendar is light through the early part of the week, with a series of sentiment surveys due. If recent history is any indication, these will be largely ignored by markets.
The Reserve Bank of Australia looks likely to keep interest rates on hold at its policy meeting tomorrow - but could retain a relatively hawkish bias in its communications. After delivering 350 basis points in tightening since last May, the central bank is seeing signs of strain in the overleveraged household sector, and could choose to pause as the domestic economy braces for spillover effects from recent market turmoil. Another hike remains possible however, with strong employment, robust business activity, and persistent global inflation likely to put policymakers on a data-dependent footing into the May rate decision.
Canada will report its latest employment numbers on Thursday, and the US will drop its non-farm payrolls number on Good Friday. Job markets are widely expected to remain strong, but with McDonald’s closing its corporate offices to prepare for layoffs this week, incoming evidence would suggest that weakness is gradually spreading from the long-overheated technology sector into areas that employ the bulk of the workforce.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
@KARL_SCHAMOTTA
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