Pictet North America Advisors SA
Saudi Arabia will implement a “voluntary cut” of 500k b/d
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Highlights
OPEC
Saudi Arabia will implement a “voluntary cut” of 500k b/d (barrels per day), or just under 5% of its output, in co-ordination with some other OPEC and non-OPEC countries. The kingdom is attempting to boost prices amid fears of weaker demand. Russia, a member of OPEC+, said it would extend its existing 500k b/d production cut until the end of the year. Moscow’s reduction was first announced in Mar. in retaliation for western countries’ moves to impose a price cap on its seaborne oil exports. The initiative is unusual as it has been announced outside a formal OPEC+ meeting, suggesting an element of urgency by the members taking part in the cuts. Iraq will reduce crude production by 211k b/d, the United Arab Emirates by 144k b/d, Kuwait by 128k b/d, Kazakhstan by 78k b/d, Algeria by 48k b/d and Oman by 40k b/d.
On rates
A stabilization in the banking sector and a pick-up in risk sentiment led market participants to reprice the probability of an additional rate hike of the Fed in May to more than 50%. Investors now expect less rate cuts from the Fed by the end of 2023 (only by 50bps). Regarding the ECB, an additional 50bps hike by summer is priced in. This drove up two-year sovereign bond yields both in the US and in Germany this week, with yields standing at 4.12% (+35bps) and 2.75% (+36bps), respectively. Because 10-year sovereign bond yields rose less, it has led to a renewed flattening of both the US and German yield curve. Looking at USD money market funds weekly data, inflows continue but they have slowed down to +$66bn over the week, still primarily from institutional investors and mostly into Money Market funds investing in government debt, so the safest ones.
Market update
Some relief
The S&P 500 closed the week at 4,109.31, +3.48% higher. The Dow Jones closed at 33,274.15, +3.22%, with the Nasdaq higher by +3.37%. The volatility index VIX closed the week at 18.70 down from 21.74. The Euro Stoxx 600 gained +4.03%.
The 10-year UST closed at 3.47% up from 3.38% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -134bps. US Corporate Bond spreads: Investment Grade tightened 7bps at 211bps and High Yield tightened 35bps at 512bps. German 10-year Bunds yield closed at +2.29% up from +2.13% a week before. In Europe, Corporate Investment Grade spreads tightened 3bps at 187bps and High Yield spreads tightened 34bps at 496bps.
depreciated -0.59% last week and clThe US Dollar Index (DXY)osed at 102.51. The Euro closed at 1.0839 (+0.73% weekly); the Yen depreciated -1.63%, closing at 132.86 and the Swiss Franc appreciated +0.49%, closing at 0.9153. Gold closed at $1,969.28 depreciating -0.45%. Oil was higher, Brent closed at $79.77 (+6.73%) and WTI at $75.67 (+9.25%).
Macroeconomy
US banks
The latest Federal Reserve balance sheet data show bank borrowings declined slightly from elevated levels in the week ending Mar. 29th, suggesting a stabilization in banks liquidity needs. The shift from discount window borrowing to the Fed new emergency lending facility (BTFP) continued, probably reflecting an optimization of collateral usage. This is the first weekly decline since the banking turmoil started. Federal Home Loan Bank (FHLB) debt issuance has slowed further last week. They are the lender of next-to-last resort and the decline suggests banks advance borrowing needs have fallen significantly in the last two weeks. Loans remain concentrated in NY and SF regional banks and there are no obvious signs of contagion. Fed balance sheet declined for the first time since the SVB takeover, as quantitative tightening continued and loans fell. White House is proposing new regulations for medium-sized banks with assets between $100 and $250bn.
Economic data
In the US, Minneapolis Fed President Kashkari (FOMC voting member) said that it is still too early to gauge “how much of the banking stresses of the past few weeks is leading to a sustained credit crunch which would then slow down the US economy”. He noted that inflation was too high and that the services sector, excluding housing, has yet to slow down despite a series of aggressive interest-rate increases by the Fed over the past 12 months. The PCE price Index showed inflation eased in Feb. (up +0.3% m-o-m, vs. +0.6% in Jan.). The PCE core deflator rose +0.3% (the least in 3 months), below the +0.4% consensus. The moderation comes from goods prices while services rose +5.7% y-o-y. Personal income was up +0.3% in Feb., more than expected and disposable income advanced by +0.5%. The University of Michigan Consumer Sentiment Index fell to 62.0 in Mar., below the 63.3 consensus but one-year inflation expectation also fell. In Europe, most surveys (European Commission, Ifo, etc.) echoed the message of resilience given by PMIs. Activity remained strong in the services sector in Mar. and price expectations eased across all sectors. Eurostat's flash estimate showed that euro area headline inflation eased substantially to +6.9% y-o-y in April from +8.5% in Mar., while core inflation accelerated to +5.7% y-o-y from +5.6% in Feb. In core inflation, pressure remains very strong, specially in the services sector where inflation accelerated to +5.0% y-o-y from +4.8% in Feb., while goods inflation eased by 0.2% to +6.6%.
China PMIs
The official non-manufacturing PMI rose to 58.2 in Mar., up from 56.3 in Feb. Construction activities were especially strong (65.6, up from 60.2 in Feb), and the PMI for services also rose further to 56.9 from 54 in Feb. The official manufacturing PMI moderated somewhat (51.9 in Mar., down from 52.6 in Feb). Fading external demand likely is an important factor behind. Caixin manufacturing PMI came in below expectations in Mar., falling 1.6pts to 50.0 (vs. consensus at 51.4), following the rise of 2.4pts in Feb. Regarding the major components on production and demand outlook, the output component fell 2.7pts to 50.6 in Mar., while new orders fell 2.3pts to 50.6, and export orders fell 3.2pts to 49.0. Besides, it is also worth noting that the employment component fell 1.3pts to 49.3, and the input price component fell 1.7pts to 50.0.
What to watch
- Monday: Japan Tankan Q1; IT, FR, GE, EZ S&P Global Manuf. PMI (Mar.); US S&P Global PMI (Mar.); US ISM & Prices paid (Mar.)
- Tuesday: US Factory Orders (Feb.); Japan BoJ PMI (Mar.)
- Wednesday: German Factory Orders (Feb.); IT, FR, GE, EZ S&P Global Services. PMI (Mar.); US S&P Global Services PMI (Mar.)
- Thursday: German Industrial Production (Feb.); US Jobless claims
- Friday: Japan Labor cash earnings (Feb.); US NFP (Mar.); US Unemployment Rate (Mar.)