Surprise oil production cut from OPEC Plus

The OPEC+ group of oil producers has surprised markets by announcing a cut to oil production over the weekend, which is due to be implemented from May through to the close of 2023. The move will see 1.1mn b/d taken off the market, with the bulk (500,000 b/d) coming from Saudi Arabia’s production, with the UAE, Algeria, and Iraq also set to contribute. The group had been scheduled to hold a monitoring meeting this week where the expectation was that oil production would be held steady through the rest of the year, given expectations for market tightness in H2 already in place.

The Fed’s preferred measure of inflation, the core personal expenditures price index, slowed from 0.6% m/m in January to 0.3% m/m in February, the same as the headline monthly figure. On an annual basis, core was up 4.6% on the core measure and 5.0% on the headline. Inflation is still well above the Fed’s 2.0% y/y target, but the ongoing slowdown raised market expectations on Friday that the Federal Reserve would be nearing the end of its hiking cycle, although the surprise news from OPEC+ has changed sentiment once more at the start of the week.

The UK’s Q4 2022 GDP print was revised up modestly on the final reading. Growth was now at 0.1% q/q rather than the flat growth recorded on the initial print, thereby confirming that the UK (narrowly) avoided a technical recession in the second half of 2022 – the Q3 2022 contraction was revised from 0.2% q/q to 0.1% q/q. On an annual basis, Q4 growth was revised up to 0.6%, from 0.4% previously. While the UK’s GDP data has shown a surprising resilience, consensus expectation remains that the economy will shrink this year. Other data released on Friday showed that house prices were down 3.1% y/y in March, the biggest drop since 2009 according to Nationwide.

Eurozone CPI inflation was at 6.9% y/y in March on the preliminary reading. This compares to 6.6% in January and is lower than the consensus projection of 7.1%. Falling energy prices have fueled the slowdown as base effects kicked in, with Spain’s inflation rate in particular surprising to the downside on the headline this month. On a monthly basis, prices were up 0.9% m/m, beating projections of 1.1%. However, core inflation has been somewhat stickier, and this came in inline with expectations for the Eurozone at a record 5.7% y/y, up from 5.6% in February, and this is likely to be the number the ECB focuses on in the coming months. Meanwhile, the Eurozone’s unemployment rate was unchanged at 6.6% in February.

Today’s Economic Data and Events

• 11:50 France manufacturing PMI, March final. Forecast: 47.7
• 18:00 US ISM manufacturing survey, March. Forecast: 47.5
• 11:00 Turkey CPI inflation, % y/y, March. Forecast: 51.4%

Fixed Income

• US Treasuries rallied at the end of last week although Friday’s gains weren’t enough to offset selling pressure for much of the week. Yields on the 2yr UST fell 9bps to 4.0253% while 10yr UST yields dropped by about 8bps to 3.4676%. Treasuries are starting the week softer though as a surge in oil prices following the surprise OPEC+ production cut will raise inflation fears once more. For the quarter, yields on the 2yr and 10yr UST fell by about 40bps.
• European bonds also pulled higher at the end of the week with bund yields down by about 8bps at 2.286% while gilt yields fell 3bps to 3.483%.
• In central banks this week, the RBA sets policy on April 4 (hold expected), followed by the RBNZ (25bps hike) on April 5 and the RBI (25bps hike) on April 6.

FX

• The US dollar gained on Friday, benefiting from month-end flows, with the broad DXY index up 0.4% at 102.506. EURUSD provided much of the boost for the dollar with the pair down 0.6% at 1.0839 and closing the first quarter up by 1.3%. GBPUSD ended the week down by 0.4% at 1.2337, still managing a gain of 2.1% for the quarter/quarter while USDJPY pushed higher on Friday, ending at 132.86 and up 1.3% for the first quarter.
• Commodity currencies were generally weaker at the end of the week. AUDUSD fell by 0.4% to 0.6685 bringing its quarterly performance to a drop of 1.9%. NZDUSD closed lower by 0.1% at the end of last week, settling at 0.6258 and ending the quarter down 1.4%. USDCAD closed relatively unchanged on Friday while the loonie managed to rally in Q1 with USDCAD down by 0.3%.

Equities

• Despite the turbulence seen in equity markets through March as the collapse of several banks raised questions around global financial stability, most major indices have registered strong q/q gains for Q1.
• In Asia, the more rapid than anticipated easing off of zero-Covid policies in China, alongside other supportive policies, has boosted stocks, with the Shanghai Composite adding 5.9% over the quarter, while the Hang Seng closed up 3.1% q/q. In Japan, the Nikkei has added 7.5% as the yen has ended the quarter moderately weaker against the dollar.
• Gains were even more robust in Europe, where the composite STOXX 600 added 7.3% over the quarter. France’s CAC has been one of the primary gainers as it added 13.1%, lagged by the DAX which added 12.3%. The UK’s FTSE 100 has added a more modest 2.4 q/q.
• In the US, the NASDAQ was the biggest gainer over the quarter, as bets on a coming end to the Fed’s rate hiking cycle prompted a pickup in interest in interest rate sensitive growth stocks. It closed up 16.8% q/q, while the S&P 500 added 7.0%. The Dow Jones added 0.4%.
• Performance locally was more mixed as the DFM gained 2.3% q/q while the ADX dropped 7.7%. The Tadawul ended the quarter up 1.5%.

Commodities

• OPEC+ has announced a surprise production cut of collectively 1.1m b/d, taking effect from May onward until the end of the year. The cut is reportedly a “precautionary measure aimed at supporting the stability of the oil market.” Prices have surged in response, with Brent jumping to more than USD 86/b at the open after closing last week at less than USD 80/b. Brent futures are currently trading at USD 84.30/b, up by 5.7% on Friday’s close. WTI futures are showing a similar move, up by about 5.6% at USD 79.90/b.
• Saudi Arabia will cut output by 500k b/d while other sizeable contributions will come from Iraq (211k b/d), UAE (144k b/d), Kuwait (128k b/d) along with commensurate cuts at the rest of the producers’ alliance. Our oil market balance projections for this year had assumed a deficit would develop in H2 with OPEC+ holding tis prior output targets steady. That deficit is now set to widen and further supports our belief that oil prices will shake off the recent losses sparked by the strain in financial markets and will gain over the remainder of the year.
• The Kurdistan Regional Government and the central government in Iraq have reached a deal to allow oil exports to resume to a terminal in Turkey. As much as 400k b/d of exports had been interrupted after an international commerce court ruled that the exports from the KRG had needed to be made with the authorization from the central government.