- Oil prices to stay elevated as OPEC+ members struggle to raise production
- Stocks extend relief rally on signs Fed could be less aggressive
- Lower-than-expected NFP print could give fresh legs to stock bulls
- BOE set to hike again Thursday; ECB to stand pat all year
Brent and WTI are edging higher and hovering around their highest levels since 2014 in the leadup to today’s OPEC+ decision. The 23-nation alliance is widely expected to ratify another 400,000 barrels-per-day hike for March.
Overall, the incoming OPEC+ decision is set to have more bark than bite for oil markets. Several OPEC+ members, including Russia, are already struggling with spare capacity, leaving them unable to meet the raised quotas. Unless the still-unlikely Iran deal materialises in the near-term, any incoming supplies aren’t expected to substantially tilt markets back towards oversupply, defying forecasts for the current quarter. Meanwhile, global demand remains resilient as Omicron risks fade into the rearview mirror.
Such supply-demand dynamics are preserving a tight market structure, building a solid platform for oil benchmarks to climb higher and build on January’s gains of over 15%. A spike in geopolitical tensions could even trigger another surge in oil prices, potentially bringing $100 oil closer to reality.
Stocks climb as officials tone down Fed hawkishness
Risk-taking activities overall are being reinvigorated by hopes that the Fed won’t act in haste to curb surging inflation. Asian stock markets are rising alongside European and US futures, while the benchmark dollar index (DXY) and gold hold on to recent losses.
Recent Fed speak suggests that policymakers are trying to dampen market expectations that have perhaps gotten overly hawkish. Although Chair Powell refused to rule out a 50-basis-point hike in March in his post-FOMC meeting press conference last week, other Fed officials such as Kansas City Fed President Esther George have signaled a more measured approach.
Since last week, the Fed Funds futures have pared back their bets closer in line with a conventional 25-basis point hike in March, allowing room for risk sentiment to stage a relief rally. The S&P 500 has recorded its best three-day advance since 2020, registering a 5% move to pull away from correction territory and halve its drop from its record peak.
A subdued US nonfarm payrolls report this Friday could extend the runway for the ongoing relief rally. Markets are forecasting that only 150,000 jobs were added in January amid Omicron-related disruptions to the US labour market. This kind of headline NFP print would mark its slowest growth since May 2019.
Should markets be given further evidence that the Fed doesn’t have to move as aggressively as previously thought, then the recovery in risk assets may extend. Still, there’ll likely be further bouts of volatility in between FOMC meetings, until investors have a more solid grasp of the timing for Fed rate hikes and the eventual balance sheet reduction.
ECB and BOE to lay bare policy divergence
Even as market participants remain obsessed over the Fed’s policy outlook, the Bank of England and the European Central Bank are set to grab some of the spotlight with their respective policy decisions due on Thursday.
Markets appear all but certain that the BOE will raise interest rates again this week, marking their first back-to-back hikes since 2004. The pound could extend its year-to-date gains against most of its G10 peers if the central bank signals a more aggressive approach to dampening UK inflation.
Most analysts expect the ECB to keep its rates at negative 0.5% all through 2022, though the euro is poised to react to any guidance on rates at the upcoming meeting. If ECB President Christine Lagarde aligns her commentary closer to market forecasts for a hike in the third quarter of this year, that could trigger a rally in the euro, allowing it to play catch-up with other major currencies. Alternatively, Lagarde may stick to the lower-for-longer mantra, widening the policy normalisation gap between the ECB and other major central banks which would heap more downward pressure on the euro.
