Jumbo oil cut
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Highlights
OPEC+
OPEC+ members agreed to make a large production cut up to 2 million barrels per day (bpd). Analysts noted that the 2M headline figure will really translate into just over 1M bpd, or ~1% of actual global supply, given that many OPEC nations are currently producing well below their individual quota levels. This is the case of Iraq, Nigeria and Angola (OPEC Countries) as well as Russia, Mexico, Kazakhstan, Azerbaijan, Malaysia, Brunei or Sudan.
Market update
Jumbo oil cut
The S&P 500 closed the week at 3,639.66, +1.51% higher. The Dow Jones closed at 29,296.79, +1.99%, with the Nasdaq higher by +0.73%. The volatility index VIX closed the week at 31.36 down from 31.62. The Euro Stoxx 600 gained +0.98%.
The 10-year UST closed at 3.88% up from 3.83% a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST at +50bps. US Corporate Bond spreads: Investment Grade tightened 9bps at 205bps and High Yield tightened 53bps at 532bps. German 10-year Bunds yield closed at +2.19% up from +2.11% a week before. In Europe, Corporate Investment Grade spreads tightened 5bps at 235bps and High Yield spreads tightened 26bps at 654bps.
The US Dollar Index (DXY) appreciated +0.60% last week and closed at 112.79. The Euro closed at 0.9744 (-0.59% weekly); the Yen depreciated -0.35%, closing at 145.25 and the Swiss Franc depreciated -0.75%, closing at 0.9944. Gold closed at $1,694.82 appreciating +2.06%. Oil was up, Brent closed at $97.92 (+11.32%) and WTI at $92.64 (+16.54%).
Macroeconomy
Jobs report
Nonfarm employment increased by 263k in September, close to expectations and compared to the 382k average gain over the prior three months. The bigger surprise was the unemployment rate, which reversed August move up and fell 0.2% points back to its cycle low of 3.5% (the broader U-6 rate also returned to its cycle low of 6.7% in September). Average hourly earnings growth rose 0.3%, or 5.0% y-o-y, and blue-collar wages were up 0.4%, for a 5.8% y-o-y. The average
workweek was unchanged at 34.5 hours. The labor force participation rate ticked down to 62.3%. Nominal labor income increased at a 7.5% pace last quarter.
Fed speakers
San Francisco Fed President Daly pushed back on the Fed Funds futures curve pricing cuts in 2023. The message was that rates would move into restrictive territory and then be held there until the Fed was convinced that inflation had sustainably fallen. Atlanta Fed President Bostic also pushed back on the futures pricing and said that he wants to see a policy rate between 4.5% and 5% by year end and for the Fed to then hold them there until prices and the demand side of the economy
reacts. Minneapolis Fed President Kashkari advised that “until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I’m not ready to declare a pause. I think we are quite away from a pause”. President Evans said that rates would be near 4.5-4.75% by spring 2023, with market pricing terminal rates at the lower end of that range at 4.55% as of March.
US economic data
The US ISM Manufacturing survey shown an unexpected slowdown falling 1.9pts to 50.9 (vs. 52 expected) with new orders at 47.1. Weakness in Europe and China continues to constrain new export orders, which contracted for a second straight month to 47.8 level. The ISM Employment component also slumped to 48.7 level (vs. 53 expected). The September US flash Services PMI came in at 49.3 (vs. 49.2 expected), in a downward trend since 58.0 in March. The employment component however, moved up to a 6-month high of 53.0, different picture to the manufacturing print. Real Estate continued to show signs of slowdown, as the MBA Mortgage applications fell 14.2% w-o-w, as mortgage rates jumped to a 16-year high of 6.75%, marking the seventh-straight weekly increase and spurring the worst slump in home loan applications since the depths of the pandemic. MBA’s index of applications to purchase a home plummeted 12.6% to 174.1, the lowest level since 2015, while the gauge of refinancing dropped 17.8% to a 22-year low.
Global economic data
The Eurozone September Flash Manufacturing PMI recorded its third straight month of contraction, falling from 49.6 to 48.4, its lowest reading since June 2020. Both Germany and France PMI readings failed to meet forecasts, with German PMI reading at 47.8 (vs. 48.3 expected) and French at 47.7 (vs. 47.8 expected). The Services PMI came in at 48.8 (vs. 48.9 expected). In France, the September flash Services PMI came in at 52.9 (vs. 53.0 expected), while Industrial production
surprised economists with a 2.4% increase m-o-m (vs. 0% expected growth). The German PMI stood at 45 (vs. 45.4 expected), while the country’s trade balance in August was positive at EUR 1.2bn, well below the expectations of 4.7bn, as imports surged 3.4% (vs. 1.1% expected) and exports rose 1.6% (vs. 1.5% expected) on m-o-m basis.
Central banks
Australia central bank surprised investors by raising interest rates by 25bps, ending a streak of outsized increases. The cash rate stands now at 2.6%, predicted by only a quarter of economists surveyed. Governor Philip Lowe reinforced a commitment to tightening even as he acted on signals that he would do so at a slower pace. The decision prompted the biggest intraday drop in three-year government bond yields since October 2008, when the RBA cut by 100bps. The Reserve Bank of New
Zealand (RBNZ) raised its cash rate 50bps to 3.50% as expected. The committee agreed it remains appropriate to continue to tighten at a pace to maintain price stability and contribute to maximum sustainable employment. The central bank also concerned that a lower NZD, if sustained, poses further upside risk to inflation over the forecast horizon.
What to watch
- Monday: US ISM manuf. index (Apr.)
- Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
- Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
- Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
- Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)