Oil, Well...

Oil prices jumped to the highest since January as OPEC and allies said they would cut production. WTI May futures surged as much as 8% to $81.67 before trimming gains. The rally came as first Saudi Arabia said it would implement a voluntary cut of 5% of output, or around 500k bpd, and Russia also said it would extend a 500k bpd cut to the end of the year. The “precautionary measure” will take a collective 1.16m bpd out of the market. It looks like OPEC is getting a bit panicky about demand this year and is trying to create a psychological floor at $80.It suggests OPEC thinks the Fed is heading for a hard landing – the banking ‘crisis’ is the catalyst for this move and OPEC wants to get ahead of it. We look to see whether the market unwinds this gap, or whether China demand picks up enough to push the market back towards $100. Because of who is making the cuts, it looks like this will be a real supply cut. Momentum in the global economy is the unknown.

What does it tell us? One, inflation is going to be harder to tame – regular readers will be familiar with this theme. Higher energy prices only create stickier goods inflation – which is supposed to be coming down. The Saudis are not afraid of the US – we are seeing a recasting of regional and global dynamics – in light of Covid, in light of US-China tensions, the Biden regime, whatever. But we are seeing a new era, as evidenced by the China-brokered Saudi-Iran deal. The Saudis are doing what they need to do, and the White House has no say, it seems. On geopolitics, Taiwanese President Tsai Ing-wen is due to meet House Speaker Kevin McCarthy this week in California. As for OPEC, it’s got leverage again.  

Continental Conundrums  

European stock markets were mixed in early trade on Monday, with the FTSE 100 adding 0.7%  to 7,684, with the DAX up to 15,651. London benefited from +4% gains for Shell and BP on the jump in oil prices. US markets rallied strongly on Friday as the Fed’s preferred inflation gauge cooled somewhat, with the core PCE down to 0.3% in February, less than the +0.4% expected. The Nasdaq ended the quarter almost 17% higher, its best quarter since 2020, whilst the S&P 500 rose 7%.  

The Swiss prosecutor is to investigate Credit Suisse takeover by UBS...recriminations will flow but the deed is done. Shareholders get to voice their dismay/concern/jubilation at AGMs for both banks this week. Banking shares in Europe traded broadly higher at around +1% for the Stoxx banks index.  

Data Doubts

Tesla shares traded weaker in Frankfurt as record deliveries fell short of expectations. Deliveries rose 4% in the first quarter to 422,875 units as price cuts boosted demand. BYD is selling five times as many Teslas in China. The loss of market share in China is a major worry even as US tax credits are helping.  

Data overnight not terribly encouraging - Japan Tankan business sentiment survey declined to lowest in two years, with headline for large manufacturers +1 from +7. China’s Caixin Manufacturing PMI fell to 50.0 from 51.6 and lower than expectations of 51.7.  

The US manufacturing sector is the focus with the latest ISM PMI report later today. The previous report showed economic activity in the manufacturing sector contracted in February for the fourth consecutive month, following a 28-month period of growth. Worryingly for the Fed, the prices paid component jumped to an inflationary 51.3 from 44.5 in Jan – underlying the stickiness of inflation. Markets will be especially looking to see whether there is any further incremental increase in the price component.  

Oceanic Bank Rates at Odds

RBA likely to pause on Tuesday: Inflation has cooled and officials at the Reserve Bank of Australia have already signaled they could pause. Minutes from the March meeting said: “Members agreed to reconsider the case for a pause at the following meeting, recognising that pausing would allow additional time to assess the outlook for the economy.” Meanwhile, Australian inflation slowed to its lowest in eight months at 6.8% vs expected 7.1% and 7.4% previously. This underlines the case for the RBA to pause its hiking cycle.  

By contrast, the Reserve Bank of New Zealand is expected to raise rates. ANZ says it expects the RBNZ will raise the Official Cash Rate (OCR) 25bps to 5.0% at its Monetary Policy Review, whilst a 50bps hike is more likely than a pause despite “global financial sector wobbles [suggesting] a degree of caution is appropriate”. RBNZ officials believe rates are in contractionary territory but are not yet confident that inflation expectations are under control.  

Good Friday in Europe = Jobs Day in the US

The US nonfarm payrolls report is the only show in town as market participants eye whether there are any signs of cracks in the labour market. Last month was the same old: wages up, jobs growth still strong, unemployment up a bit. Labour market participation was up, with the labour force back to pre-pandemic levels. Wage growth month on month slowed but year on year +4.6% vs 4.4% previously. If inflation remains elevated and the labour market doesn’t crack the market may need to reprice once more for higher for longer – unless the banks go through another crisis.