Oil Prices Fell Despite OPEC’s Hint to Extend Output Cut

Oil prices softened amidst a generally mixed financial market. The front-month WTI crude oil contract dropped -1.15% to settle at 48.22 while the Brent contract was down -0.27% to close at 51.62. Traders remained concerned over the buildup of US oil supply, shrugging off Reuters’ report that OPEC intends to extend production cuts into 2H17 and Saudi Arabia’s data that the Kingdom has trimmed crude exports by -0.3M bpd in January. The equity markets were mixed after British PM Theresa May confirmed that she would trigger, on March 29, Article 50 of the Lisbon Treaty. It would then take around 2 years for the UK to formally leave the EU. GBPUSD soared to a 3-week high of 1.2435 before reversing and settling at 1.2356, down -0.29%. Wall Street was largely flat with DJIA and S&P 500 slipping -0.04% and -0.2% respectively. US Treasury yields were lower as little insight was seen from Fed presidents’ speech after last week’s FOMC minutes. Chicago Fed president Charles Evans indicated that he could support two or three rate increases this year.

UK PM Theresa May confirmed that the government would trigger Article 50 of the Lisbon Treaty on March 29, so as to ensure that the process would be completed by the ned of March 2019. As she noted in a visit to Swansea, Wales, May pledged to “get the best possible deal for the United Kingdom”, including “a good free-trade deal” with the EU and a security agreement after Brexit. In response the May’s move, lead negotiator, Michel Barnier, noted in Twitter that the EU were preparing to impose customs controls, despite May’s determination to secure “frictionless trade”. European Council president Donald Tusk indicated that he would distribute his response to the British government within 48 hours of next Wednesday.

The March FOMC meeting was not as hawkish as some had expected. Chicago Fed President Charles Evans suggested he would not rule out the possibility of four rate hikes “if things really pick up”, with, e.g. inflation rising over +2% but it is certainly not his base case. At an interview with Fox Business, Evans noted that “as I gain more confidence in the outlook I could support three total this year. If inflation began to pick up, that would certainly solidify (that expectation). It could be three, it could be two, it could be four if things really pick up”. Commenting on Donald Trump’s GDP growth outlook, Evans suggested that “4% would be really an outsized number”. Meanwhile, Minneapolis Fed President Neel Kashkari, who dissented a rate hike last week suggested that he would be “very surprised” if core inflation reached 2% this year. He reiterated that there is no urgency to hike interest rate as there is no “high-inflation threat right around the corner”.

Released earlier today, the RBA minutes for the March meeting revealed concerns over the increasing levels of household debts which would be exacerbated by rising unemployment and falling consumption. The members also noted there had been a “buildup of risks associated with the housing market”. Meanwhile, Treasurer Scott Morrison warned yesterday that “there remain pressures that have built up again over the last few months”. He and the chief corporate regulator have indicated that measures to further crack down property investor loans would be implemented. According to Morrison, “Australia has a very high proportion of interest only loans and these are issues that have been the topic of discussion”.

On the dataflow, today’s focus is on UK’s inflation. Headline CPI probably rose to +2.1% y/y in February, from +1.8% a month ago. Core inflation might have also improved t +1.7% y/y, from +1.6% in January. Separate, the CBI Industrial Trends Survey for March might show the total order index slipping to 5 from 8 in February. The housing price index might have gained +6.3% y/y in January, easing from +7.2% a month ago.