A 6+% gain in oil prices has been the key market mover to kick off the week, after the surprise weekend decision by OPEC+ to cut production. This pushed up global rates, only to see them fall back after a weak US ISM manufacturing print. Oil-sensitive currencies have outperformed and the USD is broadly weaker, seeing a modest gain in NZD/USD but weaker NZD/AUD.
Oil prices surged on Monday’s open after the surprise move by OPEC+ over the weekend to cut oil production by more than 1 million barrels a day. Brent crude is currently up over 6% for the day, at around USD85 per barrel. A Bloomberg report noted that the move was designed to inflict some pain on short-sellers in the market after the recent slump in prices had taken Brent crude to its lowest level in fifteen months.
Higher oil prices will add to headline CPI inflation figures, at a time when central banks are fighting hard to bring inflation down, although the recent focus has been on getting services sector inflation under control. Central bankers haven’t over-played the oil move, with the Fed’s Bullard saying he’d already expected higher oil prices and “whether it will have a lasting impact I think is an open question”. ECB GC member Simkus said “there are more factors there than the OPEC+ decisions”, noting that general trends are most important. The ECB’s Holzmann said the oil production cuts will add to inflation “on the margin” and isn’t likely to have a major impact on the path ahead for rates. The Austrian is one of the most hawkish members on the GC and he added that another 50bps is still on the cards for May “if things in May haven’t really become more terrible”, with reference to the recent global banking system turmoil.
In other key market-moving news, the US ISM manufacturing report was weaker than expected, with all the key figures falling deeper into contractionary territory, with the composite down 1.4pts to 46.3, its lowest level since 2009 excluding the plunge when COVID19 first hit. New orders fell 2.7pts to 44.3 and employment fell 2.2pts to 46.9. While the manufacturing sector is a small part of the economy, the data play to the theme of the US economy heading into recession, with higher interest rates and a significant tightening in credit conditions contributing.
In a separate survey, a Dallas Fed report showed demand for bank loans in the district fell for the fifth period in a row (the survey is conducted every 6-7 weeks), the index falling to a net minus 45.6%, driven largely by a contraction in consumer loans. Credit standards and terms continued to tighten sharply.
Higher oil prices drove US Treasury yields higher when Asia opened, the 10-year rate up 7bps to 3.54% at its intra-day peak, before rates drifted back down and fell much further after the ISM report. The rate currently sits at 3.43%, down about 8bps since the NZ close and down 4bps from Friday’s close. The 2-year rate is currently just under 4% after trading as high as 4.14%. European rates followed the same pattern, with the German 10-year rate down 4bps and the UK 10-year rate down 6bps.
Oil-sensitive currencies have outperformed, with NOK and AUD up 1.4-1.7% from Friday’s close, the latter meeting some resistance at 0.6790. The CAD is “only” 0.7% stronger, with performance hindered by its link to a generally soft USD. The weaker USD might reflect some retracement after month-end flows pushed it higher on Friday. The NZD is currently at 0.6290 after again meeting some resistance just under 0.63. NZD/AUD has steadily fallen through the day to 0.9275, down nearly 1%. Other key NZD crosses show little movement.
Not surprisingly, energy stocks are leading equity markets, with gains of more than 4% for the sectors of both the S&P500 and Euro Stoxx 600 indices. Performance for both indices has been flat to kick off the new week.
The NZ rates market showed some cross-market outperformance yesterday with 5 to 10-year NZGBs down 8-12bps and the same maturity swaps down 6-10bps. The 2-year swap rate was unchanged at 5.03%, resulting in some significant curve flattening.
In data released after its 5am embargo this morning – its timing designed for maximum media impact – Centrix reports that NZ mortgages in arrears rose for the seventh consecutive month, up 23% y/y in February to 18,900, taking the proportion in arrears to a three-year high of 1.29%. The data adds to the picture of gloom in the housing market, after hefty falls in house prices and rock-bottom activity levels.
In the day ahead, the NZ QSBO is likely to show higher business confidence from the record low of minus 73% recorded in Q4 but results still likely consistent with stagflation in the economy. The RBA meeting this afternoon will be a close call between a pause in rates and another 25bps hike, with economists divided and slightly erring towards a pause but market pricing more convicted in a view of no change in policy. The US JOLTS report tonight is expected to show some modest easing in the labour market.