Oil prices jump, and markets shrink the prospects of a Fed hike

SYDNEY (Reuters) – Oil prices jumped on Monday after Saudi Arabia and other OPEC+ producers announced a surprise round of production cuts, a potentially ominous sign for global inflation just days after sluggish US price data boosted market optimism.

Brent crude futures jumped $3.94 to $83.83 a barrel on the news that it will be cut by about 1.16 million barrels per day. US crude jumped $3.84 to $79.51, but retreated from its early peak at $81.69.

The change comes ahead of a virtual meeting of an OPEC+ ministerial committee that includes Saudi Arabia and Russia.

“The participation of the largest OPEC+ members suggests that adherence to production cuts may be stronger than in the past,” said Vivek Dar, energy analyst at CPA.

“This means that oil markets could see a contraction of about 1% of global oil supply or more from May.”

The head of investment firm Pickering Energy Partners said on Sunday that the latest cuts could raise oil prices by $10 a barrel.

Goldman Sachs raised its forecast for Brent crude to $95 a barrel by the end of the year and to $100 for 2024.

“Today’s abrupt cut is consistent with OPEC+’s new orthodoxy of acting proactively because it can without significant losses in market share,” Goldman said.

“Although this cut is surprising, it reflects important economic and potential political considerations,” he added.

The increase in energy costs somewhat overshadowed Friday’s slower reading of core inflation in the United States, which saw Wall Street end the month on a strong note.

S&P 500 futures fell 0.3% on Monday, while Nasdaq futures lost 0.6%. EUROSTOXX 50 futures were down 0.1%, while FTSE futures were up 0.1%.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.4%.

China’s blue-chip stocks (.CSI300) rose 0.7%, shying away from the Caixin/S&P survey of manufacturers that showed a sudden drop in sentiment to 50.0 in March and sat at odds with the strength seen in service surveys last week.

Japan’s Nikkei (.N225) rose 0.5%, although the manufacturers’ survey came in slightly below expectations.

There was better news from Japan’s latest manufacturing survey, which improved to 49.2 in March from 47.7 in February, the slowest contraction since November.

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The jolt to inflation expectations sent the two-year US Treasury yield up 4 basis points to 4.11%, while Federal Reserve fund futures trimmed expectations for a rate cut later in the year.

The market raised the probability of a quarter-point Fed rate hike in May to 61%, from 48% on Friday, and priced in 38 basis points of cuts by the end of the year.

This, in turn, helped the dollar gain 0.5% against the Japanese yen to 133.44, while the euro fell almost 0.5% to $1.0789. Rising oil prices are bad news for Japan’s trade balance as it imports most of its energy.

A rising dollar and yields pushed gold prices down nearly 0.9% to $1,950 an ounce.

The outlook for US interest rates may be affected by data on ISM manufacturing and payrolls released this week, although reaction to next Friday’s jobs report will be muted with the Easter holiday.

The central banks of Australia and New Zealand hold policy meetings this week, and the latter is expected to rise another quarter point to 5.0%.

Markets are betting that the RBA will halt its tightening campaign after 10 straight hikes, although analysts are more divided on whether it will continue higher. And

Reporting from Wayne Cole. Editing by Shri Navaratnam, Stephen Coates and Kenneth Maxwell

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