12th April 2023
Surprise oil production cuts
Meandering markets were bookended by two major developments last week. The OPEC+ group of oil-producing nations announced another surprise cut in output at the beginning of the week: around 1.16 million barrels a day of voluntary cuts starting in May. These come on top of those already agreed in October.
Market stability was named as the reason for the move, which came despite Washington’s pressure on Gulf States to weaken their ties with Russia. Businesses and consumers could be hit hard as oil prices are likely to rise back towards $100 a barrel – not to mention adding another challenge to central banks as they continue their efforts to put out the inflation fire.
US jobs data comes in
On Friday, the latest US jobs data was released, which will indicate the likely next move on interest rates by the Federal Reserve. It’s also the last report before the next meeting of its rate-setting committee in early May. The US Department of Labor’s data showed a slowdown in jobs growth for March in line with economists’ forecasts, adding to the week’s earlier news that job vacancies in February dropped to their lowest level in almost two years.
Wage increases also showed the lowest reading since mid-2021, rising 4.2% year-on-year. And while the unemployment rate slipped to 3.5%, the US economy seems to be cooling off – but not enough to ease inflation in the short term. The jobs report strengthened expectations the Fed will raise rates by 0.25% at its next meeting.
Cracks showing in the US economy
An Institute for Supply Management (ISM) survey released earlier in the week showed cracks appearing in the US economy – US manufacturing activity fell to its lowest level in nearly three years during March while new orders also contracted. According to Deutsche Bank, there have only been four previous occasions when the ISM manufacturing reading was this low without a recession coming in the following 12–18 months.
Further, cooling demand led the US services sector to slow more than expected in March, which makes up over two-thirds of the US economy. It’s currently central to the fight against inflation due to services prices being stickier and less responsive to interest rate increases.
It was hoped that weak economic data meant the Fed’s tightening policy was working and easing of interest rate hikes would follow. As fears of recession increase, however, investors’ previous ‘bad news is good news’ sentiment has transitioned to ‘bad news is bad news’.
The European markets
Markets in Europe had a relatively quiet week. Economic researchers at the Ifo Institute forecast a narrow recession escape for Germany and a growth of 0.1% for the first quarter, but that inflation was unlikely to ease quickly. Mark Dowding of BlueBay Asset Management agrees:
“Our recent meetings with policymakers have highlighted how core prices in the region continue to trend higher for the time being, and so it still feels premature to talk about the end of the European Central Bank (ECB) rate hiking cycle, let alone commencing a discussion as to when the central bank may start to lower rates. There is a sense that inflation may stay above 4% for some time to come, and if this is the case, then the first ECB rate cut is unlikely to occur for another 12 months.”
It’s a challenging time for the global economy, as Kristalina Georgieva, head of the International Monetary Fund (IMF), underlined by saying it would grow at approximately 3% over the next five years – its slowest pace since 1990. The IMF also expects a growth decline from 90% of advanced economies, reflecting the weight of higher borrowing costs.
Markets in Europe, Australia and Hong Kong were closed on Easter Monday, but expectations of an interest rate hike from the Fed caused Wall Street to slip.