President Biden orders record SPR release

• US President Joe Biden confirmed yesterday that the US would release 1mn bbl a day from its Strategic Petroleum Reserve in order to ease some of the upwards pressure on prices that have been hitting American consumers at the pump. He also took steps to start pressuring US oil companies into producing more oil themselves, asking Congress to start fining firms that sit on unused resources, while at the same time offering a sop to them by pledging to rebuild the SPR with purchases at USD 80/b once the current crisis has passed. According to Biden, the plan was twofold as as well as providing this ‘wartime bridge’ in oil, he was also looking to ‘strengthen our clean energy economy’, using defence production to ‘secure America’s supply chains for the critical materials that go into batteries for electric vehicles and the storage of renewable energy, lithium, graphite, nickel, and so much more.’
• China’s Caixin PMI figures for March disappointed this morning, similarly to the official PMI reading released yesterday. The manufacturing survey dropped to 48.1, from 50.4 in February, falling short of consensus projections of 49.9. This was the lowest reading since February 2020, illustrating the pressures that recent lockdowns have exerted on the Chinese economy.
• German retail sales expanded 0.3% m/m in February, down from 2.0% growth the previous month and slower than consensus expectations of a 0.5% expansion. Growth was likely constrained somewhat by the strict Covid-19 rules which remained in place in February, which limited entry to shops and restaurants to those who were either vaccinated or recovered. These ‘2G’ rules were eased in March, but the inflationary surge seen since then will likely continue to constrain buying activity – CPI inflation hit 7.6% y/y in March.
• Other inflation data from the Eurozone majors saw Spain at 9.8% and Italy at 7.0%. France also saw an uptick in inflation last month, as CPI inflation accelerated to 5.1% y/y, higher than the projected 4.9%. This compared with 4.2% the previous month and marked the fastest pace of price growth since the data series began in 1997. Governmental measures to ease the cost-of-living crisis on households meant that France’s inflation rate was slower than its neighbours’ but it will nevertheless be a key issue in the upcoming presidential elections.
• Labour market data for the Eurozone released yesterday suggested that wage price pressures might continue to drive prices in the single currency bloc higher in the coming months. The unemployment rate fell from 6.9% to 6.8% in February, a record low for the measure in data going back to 1998. While wage growth has not picked up significantly so far, labour market tightness could provide another inflationary pressure on top of those related to the elevated energy prices following Russia’s invasion of Ukraine.

Today’s key economic data releases and events

16:30 US change in nonfarm payrolls, March. Forecast: 490,000

18:00 US ISM manufacturing survey, March. Forecast: 59.0

Fixed Income

• US Treasuries closed their worst-ever quarterly performance as inflation fears, hawkish central banks and the war in Ukraine all weighed on markets. Yields on the 2yr UST oscillated somewhat and managed to settle up a bit less than 3bps at 2.3345% while the 10yr strengthened marginally with yields down by 1bps to 2.338%. With the Fed set for a more aggressive than expected hiking path in Q2 the outlook for USTs appears poor in the near term.
• European markets rallied into quarter end with gilts and bunds performing well. The 10yr bund yield closed lower by around 10bps to 0.543% while the 10yr gilt dropped almost 5bps to 1.608%. Emerging market bonds showed a mixed performance with South African bonds slipping back, yields rising 5bps on the 10yr to 9.944% and Indian bonds ended the day lower as well.
• FAB priced a EUR 500m green bond at MS+70bps, tighter than the initial pricing area.

FX

• The dollar rallied into quarter end with the DXY index up 0.5% at 98.312 and closing its best quarterly performance since Q1 2021. With markets remaining hesitant on risk and yield differentials favouring the dollar near-term we still expect a strong performance for the dollar in Q2. EURUSD closed sharply lower overnight, down 0.8% to 1.1067 as comments from the ECB’s chief economist suggested that the bank would need to allow for policy to move in either direction. USDJPY managed to move in favour of the yen at the close of the quarter, settling at 121.70, down 0.11%. The yen has weakened five quarters in a row as the BoJ divergence with other central banks remains wide. Sterling closed relatively unchanged overnight, falling almost 3% on the quarter.
• USDCAD moved against the loonie overnight with the pair up 0.2% at 1.2505 while AUDUSD sank, down almost 0.4% to 0.7482.

Equities

• Global equity markets had a parlous first quarter of 2022, hit first by the general environment of the residual pandemic, higher inflation, and imminent monetary policy tightening, and then by the war in Ukraine. In the US, the NASDAQ lost -9.1% over the first three months of the year, with a -1.5% drop yesterday. The Dow Jones and the S&P 500 lost -1.6% yesterday and ended Q1 down -4.6% and 5.0% respectively.
• By contrast, local equity markets have had an ebullient start to the year and have been some of the best performing globally. The DFM, the Tadawul and the ADX have added 10.4%, 16.0% and 17.2% respectively over the past three months, supported by higher oil prices and greater interest spurred by major IPO develompents.

Commodities

• OPEC+ agreed to increase production by 432k b/d for May, essentially rolling over its planned production increases that have be in force since August 2021. The modest increase comes amid persistent pressure from major importing nations to increase output at a faster pace as oil prices hit multi-year highs thanks to sanctions that have made Russian oil relatively inaccessible. At the same time the US announced it would release around 1m b/d for six months from strategic reserves but also added pressure on domestic producers to increase output faster or face fines on unused leases.
• Oil prices largely expected the move from OPEC+ and instead focused on the planned release of strategic petroleum reserves from the US. May Brent futures expired overnight at USD 107.91/b, down 4.9% on the day while front month Brent futures had a stellar quarter, up 39% since the end of last year. WTI closed at USD 100.28/b, down almost 7% overnight.

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