OPEC, US data keep Fed on course for steep rate rises Cecile...

OPEC, US data keep Fed on course for steep rate rises
Cecile LefortMarkets reporter
Oct 6, 2022 – 12.37pm


Resilient US employment and manufacturing data dashed hopes the Federal Reserve is on the cusp of a dovish pivot, as a promise of reduced oil production from the OPEC cartel keeps the global inflationary pulse high.

Oil prices rose after the OPEC+ group of major oil producers agreed to its deepest cuts to production since the start of the COVID-19 pandemic to stem falling prices as the global economic outlook weakens. The group will reduce its output by 2 million barrels a day.

Brent crude gained 0.3 per cent to $US93.62 a barrel and US West Texas Intermediate crude added 0.2 per cent to $US87.96 a barrel.

US Treasury yields regained ground with the 2-year government bond rate, which is sensitive to interest rate expectations, up 6 basis points to 4.15 per cent. The 10-year yield jumped 13 basis points to 3.75 per cent. The moves reflected concern that the Fed will have to keep pushing rates higher for longer to get on top of inflation.

Bond and stock prices soared earlier in the week on signs that the US economy and labour force were slowing, setting the stage for central banks to back down from rapid-fire interest rate increases.

However, the latest US ADP National Employment report showed private employment rose 208,000, beating forecasts of 200,000, in September, suggesting a solid outcome from non-farm payrolls data to be released on Friday. Economists expect a gain of 260,000 from Friday's release.


Data from the Institute for Supply Management (ISM) showed its services PMI dipped to 56.7 last month, from 56.9 in August, but above estimates for 56, conveying resilience to sharply higher borrowing costs this year. Meanwhile, the ISM employment gauge jumped to 53, from 50.2, in the prior month.

“No sign of imminent recession in the US yet,” said Joseph Capurso, head of international economics at Commonwealth Bank.
Gloom

The gap between two and 10-year US yields, a reliable indicator of a recession, stood at minus 40 basis points. When short-term borrowing costs exceed those in the longer-term, that reliably suggests an economic contraction within one to two years.

Fed officials reiterated their determination to bring inflation back to its target band even though it may tip the US economy into recession. The central bank raised interest rates by 0.75 percentage points at its last three policy meetings.

San Francisco Federal Reserve Bank president Mary Daly said the central bank was “resolute” on raising rates to bring down inflation and sees a high bar to delivering less than another 0.75 percentage point increase next month. Ms Daly is among the less hawkish members of the policy setting committee.

“We consider the FOMC will increase interest rates high enough to push the US economy into recession next year,” said Mr Capurso. CBA predicts recessions in the US, the eurozone, Britain and Japan, with the global economy expanding 1.6 per cent in 2023.

On Wednesday, the Reserve Bank of New Zealand stuck with a sizeable rate increase of 0.5 percentage points which only added to fears central banks were not yet ready to rethink their tightening approach.

The Reserve Bank of Australia bucked the global trend this week by slowing the pace of interest rate rises with a smaller than expected 0.25 percentage point lift. The move surprised financial markets, which had expected a fifth straight 0.5 percentage point increase, and sparked the biggest sharemarket rally in two years.

The Australian dollar fell 0.3 per cent against the Kiwi to $NZ1.13, having shed 1.4 per cent so far this week, the largest such slide in more than a year. Against the greenback, it rose 0.4 per cent to US65.11¢.

Former Fed vice chairman Randal Quarles said governor Philip Lowe’s decision was good forward-thinking given that inflation in Australia is less of a problem than in the United States.

Australia’s trade surplus narrowed to $8.3 billion in August, missing forecasts of $10.1 billion. Exports rose 2.6 per cent driven by coal and LNG, and imports jumped 4.5 per cent with oil the biggest contributor.