OPEC Drops the Pump

Last week, officials from the Fed and European Central Bank separately warned of higher interest rates ahead, dashing investor hopes that rate hikes were a thing of the past. New Zealand’s central bank further fueled those fears by unexpectedly increasing rates by 50 basis points last Wednesday. The prospect of higher interest rates is set to continue the massive wave of cash moving from bank deposits to money market funds, especially in the US. In fact, according to Barclays, as much as another $1.5 trillion is set to be plowed into money market funds over the next year. Elsewhere, Tesla announced that its vehicle deliveries rose to a record last quarter after slashing the prices of its EVs. Finally, in what has to be the last thing central banks trying to fight inflation wanted to see, OPEC+ unexpectedly announced a huge cut in output last week, sending oil prices soaring. Find out more in this week’s review.

Macro

You would be forgiven for thinking that further central bank rate hikes are a thing of the past, given all the recent turmoil in the banking sector. But investors all over the globe were reminded last week that policymakers are still determined to quell inflation. On Monday, European Central Bank (ECB) member Robert Holzmann said another half-percentage-point increase in rates is “still on the cards” if the turmoil that’s rocked the global banking system doesn’t worsen. Holzmann is part of the ECB’s Governing Council, which votes on interest rate decisions, and his comments are among the most concrete yet on what the ECB’s next steps may be.

A day later, Federal Reserve Bank of Cleveland President Loretta Mester said that the US central bank likely has more interest rate rises ahead, amid signs that the recent troubles in the banking sector have been contained. To keep inflation on a sustained downward path to 2% and inflation expectations anchored, Mester said that policymakers should move their benchmark rate above 5% this year and hold it at restrictive levels for some time. She also said that she doesn’t anticipate any rate cuts this year. That’s a sharp contrast to traders’ expectations, with interest rate futures pricing in around 63 basis points’ worth of cuts between now and the end of the year.

A day later, New Zealand’s central bank delivered a surprise rate decision, unexpectedly increasing interest rates by 50 basis points. The decision wrong-footed most economists who were expecting a 25-basis-point hike, and delivered a stark reminder to investors that central banks are still willing to make bold moves in an effort to crush inflation – even if that comes at the expense of a recession. See, while New Zealand’s central bank has projected a recession starting in the second quarter, there is a risk the slowdown may have come earlier after the economy unexpectedly contracted in the three months through December.

The prospect of further increases in interest rates is set to continue the massive wave of cash moving from bank deposits to money market funds, especially in the US. We touched on this during last week’s review. If you recall, the flows are being driven by two key factors. First, the collapse of two regional US banks and the rescue deal for Credit Suisse are raising concerns about the safety of bank deposits, pushing savers and businesses to look for alternative safe havens to park their cash. This is especially the case among large depositors who hold more than the $250,000 limit insured by the Federal Deposit Insurance Corporation. Second, the yields available on money market funds are now the best in years as they rise with interest rates. In contrast, banks have barely passed on the Fed’s higher interest rates to their depositors.

That second point is particularly important. See, over the past two decades, money market funds have passed on around 88% of changes in central bank interest rates, compared with just 26% for rates on retail cash deposits – more than three times the amount. That’s according to the Federal Reserve Bank of New York, which released its findings in an updated study posted last week. That dynamic means that there’s scope for money market funds to keep ballooning in size as rates head higher. In fact, according to a new research note by Barclays last week, the bank sees the recent wave of cash plowing into money market funds as only just beginning, with as much as another $1.5 trillion set to enter over the next year.

Stocks

Tesla announced at the start of last week that it handed a record 422,875 vehicles to customers in the first quarter of the year – up 4% from the previous quarter and slightly ahead of analyst estimates of 421,164. On a year-on-year basis, deliveries grew by 36% – far below Tesla’s long-held goal of 50% annual growth, meaning that the firm will have to pick up the pace of deliveries during the rest of the year. The record numbers come after Tesla cut the prices of its EVs to appeal to customers hit by rising interest rates and inflation, and investors will be looking closely to see the impact of that decision on the firm’s profit margins when it reports its financial results later this month. Tesla also reported that it produced a record 441,000 cars in the first quarter of the year. But that means that the firm’s production outpaced deliveries for the fourth straight quarter on the back of continued logistical issues.

Commodities

Central bankers trying to fight inflation probably don't need another obstacle, but it’s exactly what they got at the start of last week. Oil prices surged on Monday after OPEC+ unexpectedly announced a huge cut in output, abandoning previous assurances that it would hold supply steady. OPEC+ – the group of the world’s biggest oil-producing countries and their allies – plans to trim production by 1.15 million barrels a day starting from May until the end of the year. The pledge comes on top of previous trims to production announced last year and brings the total volume of cuts by OPEC+ to 3.66 million barrels a day, according to calculations by Reuters. That’s equal to 3.7% of global demand.

The move sent oil futures soaring as much as 8% last Monday, with many top energy analysts now expecting oil prices to reach $100 a barrel after the decision. That would only add to existing inflationary pressures and may force central banks around the world to keep interest rates higher for longer, resurfacing worries that aggressive monetary tightening could tip the global economy into recession. So why did OPEC+ do it? Well, the cartel was probably unhappy with oil’s recent drop, with the price of crude touching a 15-month low in March as a banking crisis threatened to hobble the economy. What’s more, speculation is rife that Saudi Arabia – the cartel’s de-facto leader – purposely wanted to punish short sellers that were betting on a further drop in the price of oil.

This week

• Monday: Eurozone Sentix Investor Confidence index (April).
• Tuesday: Eurozone retail sales (February), Chinese inflation (March).
• Wednesday: US inflation (March), minutes of the Fed’s last meeting, Bank of Canada interest rate announcement. Earnings: BlackRock.
• Thursday: UK GDP (February), China trade balance (March). Earnings: Delta Air Lines.
• Friday: US retail sales (March). Earnings: Citigroup, JPMorgan, Wells Fargo