IEA Announces a Collective Reserve Release

Market movers today

ECB minutes from the March meeting will be released today, focus will naturally be on the inflation outlook, recession risks and the pace of future policy normalization. Euro Area February Retail Sales will also be released, but the data is already largely outdated due to the war.

From the US, weekly jobless claims will be released. In the evening, we will have several Fed speakers on the wires, including Bullard, Evans and Williams.

The 60 second overview

Oil release: Oil prices fell yesterday, as the member countries of the International Energy Agency (IEA) announced a collective reserve release of 120 million barrels, of which 60 million barrels comes from the US SPR release announced last week. While the US oil will be released at a pace of 1M barrels per day, the pace for the non-US release is not yet known. Nevertheless, if released over the same 6 month period as the US oil, the new release announced today would account for around 11% of the IEA-estimated decline in Russian oil supply. Significant uncertainty still persists on the scale of the supply drop. China was the largest pre-war buyer of Russian crude, but so far Chinese state-owned refiners have refrained from entering new buying contracts for Russian oil despite the heavy discount due to the risk of US secondary sanctions. Unless Russia finds alternative buyers for its oil, the persistent drop in supply should likely keep prices elevated for longer despite the reserve releases.

FOMC minutes: While the Fed hiked by ‘just’ 25bp in March, “many” participants were favoring a 50bp hike if it were not for elevated geopolitical uncertainty after the Russian invasion of Ukraine. Also “many” participants believe one or more 50bp rate increases would be appropriate near-term, as inflation is high and labor demand is strong. This is in line with what we have heard since the FOMC meeting with no one excluding a 50bp rate hike and it is clear that the Fed would like to front-load rate hikes in order to get back to neutral faster, as monetary policy is way too accommodative given the economic situation. We continue to expect the Fed to hike by 50bp on each of the next three meetings (May, June and July) and 25bp on each of the following meetings. This would take the Fed funds target range to 2.50-2.75% by the end of the year. We discussed in further details in Fed Update: Quickly back to neutral by front-loading rate hikes, 30 March. The minutes also support our call that the Fed will announce the beginning of QT at the next meeting in May. The runoff cap of likely USD95bn per month (possibly phased in over three months) is slightly lower than we anticipated.

Equities: Risk off in markets on Wednesday, especially in Europe while US recovered well off day’s lows. Cyclicals and growth retreated lower for a second day and quite markedly so (growth underperformed value by 200bp). Defensives and materials were the only sectors higher. Dow -0.4%, S&P 500 -1%, Nasdaq -2.2% and Russell 2000 -1.4%. US futures are pointing somewhat lower this morning too.

FI: The aggressive pricing of both the Federal Reserve and ECB continues with almost 220bp discounted from the Federal Reserve and almost 70bp from ECB by the end of 2022. However, yesterday we saw a decent steepening of the US yield curve, where the 2Y US government bond yield dropped 5bp while 10Y Treasuries rose 5bp. The positive sentiment in the front end of the US Treasury curve has continued this morning in Asian trade.

FX: Oil prices fell yesterday. USD/JPY has continued higher.

Credit: With equities selling off across all major indices, Credit markets continued along in risk-off mode on Wednesday. Itraxx main widened 2.8bp to close at 76.4bp, while Xover was 17.6bp wider, closing the day at 365.4bp.

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