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OPEC+ Plans Larger Output Cuts

Market movers today

Today, we get the final September service PMIs globally and the ISM service index in the US. Earlier in the week, the US ISM manufacturing index disappointed by falling to 50.9 vs. 52.0 expected. However, the service sector momentum remains strong with the index deep in expansionary territory sending no signals of a recession.

Swedish September Services PMI looks set to take a further step down from the relatively high 59.4 print in August.

The OPEC+ meeting in Vienna is expected to agree on output cuts.

Also, the US ADP employment report is published today ahead of the non-farm payrolls on Friday.

Poland’s central bank is expected to raise its policy rate by 25bp to 7% amid high inflation which creeped up to 17% in September compared with a year ago, while the economy is clearly slowing.

The 60 second overview

First sign of the US labour market cooling? Yesterday’s weak US JOLTs report sparked speculation of an earlier end to the Fed hiking cycle than previously anticipated. Job openings fell broadly across sectors to 10.1 million, the lowest since June 2021. The overall level still remains above pre-covid trend, and Fed’s Daly commented yesterday that there is still ‘a lot of room’ for demand to cool in order to ease the current inflation. In any case, together with the ISM manufacturing new orders now below 50, the figures send a clear signal that the economy is moving in the right direction for the Fed. In addition, the recent rise in real yields and declining inflation expectations suggest that the hawkish post-Jackson Hole narrative has worked as intended. However, with oil prices recovering, we think it is still too early for the Fed to signal a ‘pivot’, and continue to look for further hikes in the last two meetings of the year. Friday’s jobs report will gather a lot of attention as it will be the last one before the November meeting, a combination of modest employment growth, easing wage inflation and recovering labour force participation would be the optimal mix for the Fed and the risk markets.

OPEC+ plans larger output cuts: Brent rebounded above USD90/bbl ahead of today’s OPEC+ meeting, where a large production cut of potentially 2mb/d could be in the cards. An output cut of 1-2mb/d should lead the market to rally further and Brent to eye the USD100/bbl mark, but it depends on the details, e.g. what is the baseline output level for the cut, what is the time horizon for implementation, is it contingent on market development etc. After the OPEC announcement we will watch out for reaction from US, e.g. will US accelerate selling of strategic reserves ahead of mid-term elections, speed up revival of Iran nuclear deal and reconsider lifting sanctions on Venezuela. Regardless, it looks like OPEC+ aims to floor oil prices around current levels, which supports our view that Brent trades close to USD100/bbl in Q4.

New Zealand central bank hikes rate as expected: This morning the Reserve Bank of New Zealand (RBNZ) hiked the official cash rate by 50bp to 3.50% overnight as widely expected. RBNZ continues to see domestic core inflation pressures elevated, as the local economic outlook still remains modestly positive despite the global recession fears. While the statement itself stuck to the hawkish narrative seen in the past meetings, recent comments by the RBNZ governor Adrian Orr suggest that the hiking cycle is nearing its end.

Equities: After a strong session yesterday where US and European equity markets surged, US futures are pointing lower this morning. Hence, it does not look like a sustained rally in risk.

FI: Global bond yields rallied on the back of a softer than expected Australian central bank that raised rates by “only” 50bp rather than the 75bp expected. Furthermore, US economic data was also softer than expected combined with bond buying from BoE. All contributed to lower yields. We expect that the major central banks will try to dampen the volatility in the market as they tighten monetary policy in order to bring down inflation.

FX: EUR/USD has risen close to 5 figures in little over a week and equally, many other asset classes have shown ‘momentum reversal’ e.g., Brent is back above USD90/barrel and equities have seen quite the lift over a few sessions. Overall, we view these as short-term and continue to see a strong outlook for the USD into next year. Today’s focus turns to the OPEC+ meeting, where a large production cut of potentially 2mb/d could be in the cards. In our view, downwards pressure on EUR/DKK is of persistent nature and warrants a wider spread between DN and ECB policy rates. We now expect DN to hike 10bp less than ECB.

Credit: Credit saw a very strong session yesterday, with iTraxx Xover and Main tightening a massive 37bp and 9bp, respectively.

Nordic macro

Swedish September Services PMI looks set to take a further step down from the relatively high 59.4 print in August. This is evident looking at Swedish Manufacturing PMI, Eurozone flash services PMI and Swedish NIER private services sector confidence indicators. This should signal a move closer to recession in coming quarters. The Debt Office issues 1061 and 1065 Govies, SEK 1bn each. Kommuninvest (munis) potentially issues bonds in 2024-2029 maturities.

In Denmark, Danmarks Nationalbank (DN) resumed FX intervention selling of DKK in September to floor EUR/DKK. DN intervened for DKK 23bn. Given that the EUR/DKK continues to hover at the lower end of the FX target band, we now expect DN to hike 10bp less than ECB on 3M, i.e. hike the key policy rate to 1.80% by the end of the year and 2.30% in February next year.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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