Please see the below article from Brooks Macdonald, providing a brief analysis of the past week’s economic and markets news. Received yesterday afternoon – 03/04/2023
Equities rallied on Friday as US and Eurozone inflation expectations came in below market expectations
Equity markets ended Q1 strongly on Friday, with the US index staging a late rally to cap off a positive week for markets as investors look to move past the banking turmoil of recent weeks. A significant driver of the risk on move was Friday’s softer-than-expected inflation data, which allowed bonds to rally after a tough week for the asset class.
On Friday the latest Core Personal Consumption Expenditure (PCE) inflation index was released, which came in at 0.3% month-on-month, lower than market expectations. The year-on-year reading of the US Federal Reserve’s (Fed) preferred inflation measure also missed expectations, coming in at 5%. Inflation expectations were somewhat of a mixed bag with the University of Michigan survey showing a fall in 1-year inflation expectations whilst those over 5 and 10 years rose. We also saw the Eurozone area inflation released which missed expectations after concerns had risen that European inflation would be stickier after the German release earlier in the week.
OPEC+ announced over the weekend that they were set to cut oil production by 1 million barrels-a-day
Over the weekend the OPEC+ group of oil exporting countries unexpectedly announced that they would cut oil output starting in May. The cut is set to exceed 1 million barrels a day with Saudi Arabia alone cutting 500,000 barrels a day. OPEC+ agreed to allow Russia to keep production unchanged as it struggles to finance the ongoing war in Ukraine. The White House strongly opposed this latest cut, citing its impact on consumers and its global inflationary impact. Global oil demand has been soft in Q1 of 2023 with oil prices falling each month of this year so far, as a result it is currently uncertain as to the equilibrium price for oil after the supply cuts. Falling oil prices have been a major driver of some of the disinflationary forces of the last 6 months and therefore policy makers will be concerned that the latest OPEC+ move may push back against their attempts to control inflation.
The risk of higher energy prices over the coming months will concern governments and central banks
Oil prices have started the week sharply higher with US equity market futures pointing to a lower start to US trading after the late rally on Friday. Lower energy prices have undoubtedly played into the lower 1-year consumer inflation expectation numbers released on Friday. Policy makers will be very conscious of the risks that a new surge in energy prices will represent and this will give further impetus to central banks to retain a hawkish narrative.
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Alex Kitteringham
4th April 2023