Core inflation in the Eurozone remains high. OPEC countries are going to cut oil production ahead of summer

April 3, 2023

The Fed’s preferred measure of inflation, the PCE Core Price Index (personal consumption expenditures excluding home prices), fell on an annualized basis from 5.3% to 5.0%. Signs of a slowdown in inflation have reinforced the hopes of the Federal Reserve to end its aggressive rate hikes soon. This bolstered confidence in stock indices. At the close of the stock market on Friday, the Dow Jones Index (US30) gained 1.26% (+ 3.09% for the week), and the S&P 500 Index (US500) added 1.44% (+ 3.17% for the week). The NASDAQ Technology Index (US100) jumped by 1.74% (+2.98% for the week). The Nasdaq recorded its biggest quarterly percentage gain since June 2020.

Boston Fed President Susan Collins said Friday that whenever the US central bank stops raising its rate, maintaining that level for a while will be crucial to bringing high inflation down to the 2% target.

Equity markets in Europe were mostly up on Friday. German DAX (DE30) gained 0.69% (+3.27% for the week), French CAC 40 (FR40) added 0.81% (+3.08% for the week), Spanish IBEX 35 (ES35) added 0.35% (+3.84% for the week), British FTSE 100 (UK100) gained 0.15% (+3.06% for the week).

Eurozone’s inflation fell to 6.9% y/y in March. This is a decent drop from 8.5% y/y in February and below the Bloomberg consensus forecast of 7.1% y/y. However, core inflation increased to 5.7% y/y in March from 5.6% y/y in February. The overall drop is the base effect of the rapid rise in energy prices last March. The details show that prices for services increased underlying inflation. Service prices rose by 5.0% y/y in March, up from 4.8% y/y in February, and growth was strong on a monthly basis as well. Services prices have the highest labor content, and hence higher services inflation likely partly reflects rising wage growth. Analysts are betting on a 0.5% interest rate hike at the May meeting of Europe’s Central Bank.

Monthly UK GDP increased by 0.3% in January 2023 after declining by 0.5% in December. For the first quarter of 2023, GDP increased by 0.1%. Given that the pace of growth remains and inflation is expected to fall, the Bank of England may refrain from raising rates further if the next consumer price data indicates that inflationary pressures are easing.

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Saudi Arabia and other OPEC oil producers on Sunday announced voluntary production cuts, with Saudi Arabia cutting production by 500,000 BPD from May through the end of 2023. The UAE said it would cut production by 144,000 BPD, Kuwait announced a cut of 128,000 BPD, Iraq will cut production by 211,000 BPD, and Oman announced a cut of 40,000 BPD. Algeria said it would cut production by 48,000 BPD. In total, this is a reduction of more than 1 million BPD. In a statement, the Ministry of Energy of Saudi Arabia said that the voluntary reduction of production by the kingdom was a precautionary measure aimed at maintaining the stability of the oil market. Thus, oil traders expect oil prices to rise on the eve of summer.

Asian markets mostly rose last week. Japan’s Nikkei 225 (JP225) gained 2.03%, China’s FTSE China A50 (CHA50) added 0.75%, Hong Kong’s Hang Seng (HK50) jumped by 2.76%, India’s NIFTY 50 (IND50) added 1.99%, and Australia’s S&P/ASX 200 (AU200) was positive by 3.20% over the week.

Australia’s Central Bank is expected to go for a final interest rate hike of 25 basis points to 3.85% on Tuesday. Australia’s new monthly consumer price gauge released last week showed that inflation slowed to an eight-month low of 6.8% in February from 7.4% the previous month, bolstering the case for holding off on raising rates.

Markets are full of rumors that the Bank of Japan may modify or abandon bond yield curve control (YCC) when new governor Kazuo Ueda and his team take office. With Yield Curve Control (YCC), the Bank of Japan sets short-term rates at 0.1% and 10-year bond yields at around 0%. Its huge bond purchases to protect the 0.5% limit set for the 10-year yield target has been criticized for distorting bond prices and disrupting the market by depleting liquidity. A statement on the IMF policy consultation said that many of its executive board directors urged the Bank of Japan to “consider options to increase flexibility” within the YCC to address the side effects of prolonged easing.

In the commodities market, futures on WTI crude (+9.3%), cotton (+8.11%), sugar (+7.11%), Brent crude (+6.59%), soybeans (+5.37%), orange juice (+5.18%), silver (+3.84%), palladium (+2.91%) and corn (+2.41%) showed the biggest gains last week. Futures on lumber (-10.4%), coffee (-4.88%), and natural gas (-2.26%) showed the biggest drop.

S&P 500 (F) (US500) 4,109.31 +58.48 (+1.44%)

Dow Jones (US30)33,274.15 +415.12 (+1.26%)

DAX (DE40) 15,628.84 +106.44 (+0.69%)

FTSE 100 (UK100) 7,631.74 +11.31 (+0.15%)

USD Index 102.51 +0.36 (+0.35%)

Important events for today:

– Japan Tankan Large Manufacturers Index (q/q) at 02:50 (GMT+3);
– Japan Tankan Large Non-Manufacturers Index (q/q) at 02:50 (GMT+3);
– Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
– Australia Retail Sales (m/m) at 04:30 (GMT+3);
– Switzerland Consumer Price Index (m/m) at 09:30 (GMT+3);
– German Manufacturing PMI (m/m) at 10:55 (GMT+3);
– Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
– UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
– OPEC Meeting (m/m) at 13:00 (GMT+3);
– Canada Manufacturing PMI (m/m) at 16:30 (GMT+3);
– US ISM Manufacturing PMI (m/m) at 17:00 (GMT+3);
– Canada BoC Business Outlook Survey at 17:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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Core inflation in the Eurozone remains high. OPEC countries are going to cut oil production ahead of summer