Market Update – 5th April 2023.

On Monday markets were surprised by an announcement from OPEC+ (The Organization of Petroleum Exporting Countries) that its members would cut output by 1.16 million barrels a day from May until the end of 2023. The organisation stated that the move was a “precautionary measure” targeted at stabilising the oil market considering slowing economic growth and rising oil stockpiles. Energy stocks such as Shell and BP posted strong gains following the news, which comes after fears of weakening demand and turmoil in the banking sector caused oil prices to fall to near $70 per barrel, down from the highs in March 2022 at $139.

Over in Europe, producer prices dropped by 0.5% from a month earlier in February 2023, more than market expectations of a 0.3% decrease and following a 2.8% fall in January. This was mainly down to a 1.6% fall in energy prices, however, OPEC+’s recent decision to cut output has reignited fears of persistent inflation and therefore, uncertainty surrounding central banks future interest rates.

Helped by recent signs of resilience in the UK economy, the pound hit a 10-month high against the dollar on Tuesday, rising to $1.252. We also heard from the Bank of England’s chief economist, Huw Pill, yesterday who said that whilst inflation is set to fall this year due to a combination of base effects and lower energy prices “caution is still needed in assessing inflation prospects on account of the potential persistence of domestically generated inflation”. Whilst Pill would not offer any guidance on how he would vote at the next money policy meeting, markets are currently pricing in a 70% chance of another quarter point rate rise.

Over in the US, data showed that the number of job openings fell across most sectors to 9.9 million in February 2023, the lowest level since May 2021 and below market expectations of 10.4 million, demonstrating that the tight labour market in the US may be starting to loosen. There were more signs of slowing growth in the US with ISM manufacturing PMI and Factory orders coming in lower than market forecasts. ISM manufacturing PMI continued to show contraction in March with a reading of 46.3 (below 50) compared to 47.7 in February. The latest report suggests that higher interest rates coupled with the possibility of tighter credit and higher borrowing costs are starting to weigh on business activity.

With the Fed looking to pause rate hikes soon, all eyes will be on Friday’s jobs report (unemployment rate, non-farm payrolls and participation rate) for any signs of further weakening with in the labour market.

Like the Bank of Canada last month, the Reserve Bank of Australia also opted to pause interest rates, holding them steady at 3.6% during its April meeting, marking the first pause in the central bank’s rate rise cycle since May 2022. Whilst policymakers said further tightening may be needed, the decision to pause came amid efforts to account for policy lags.

Still to come this week we have Chinese PMI, US initial jobless claims, unemployment rate, non-farm payrolls, participation rate and average earnings.

Investment Management Team

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