Investor Fears Over Inflation, Growth Reignited by OPEC+ Move

(Bloomberg) — Just as investors put the banking crisis in the rear-view mirror, OPEC+’s unexpected output cut has reignited fears of more persistent consumer cost pressures and the risk it may delay an end of central bank hiking cycles.

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Stocks are likely to drop as higher oil prices from the production cut crimp growth, strategists said Monday. However, they suggested it may be difficult for the market to price additional rate hikes by the Federal Reserve.

Here’s the initial take of some strategists and analysts:

Rude Awakening

“The OPEC+ production cut is another reminder that the inflation genie is not back in the bottle,” said Ronald Temple, chief market strategist at Lazard Ltd. in New York. Together with the increased energy demand from China, this move increases the risk of more persistent inflation. It also likely limits the latitude central banks might have to relax monetary policy even if the economy slows.”

“For equity investors, this could be a rude awakening, as markets imply a Goldilocks outlook of reduced discount rates but no recession. Bond markets have been more sober in assessing recession risk, but perhaps too optimistic in terms of the likely central bank response to weakening growth. Today’s decision makes the outlook more complex for investors across the board.”

Fed Dilemma

“Since inflation is likely to remain the biggest driver of the Fed’s monetary policy, the market will be less likely to assume an early shift to lower rates or a faster pace of rate cuts,” said Hidehiro Joke, a strategist at Mizuho Securities in Tokyo. “However, the OPEC+ production cut report alone is unlikely to foster expectations of a prolonged rate hike, as was the case prior to the recent financial turmoil. Therefore, it will be difficult for the market to aggressively price in an additional rate hikes by the Fed.”

Growth Drag

“Stocks will trade lower today,” said Tony Sycamore, an analyst at IG Australia. “Coming on top of the fallout of the banking crisis which is expected to lead to tighter credit and slower growth, higher energy prices will also weigh on growth and likely to take some of the steam out of last weeks rebound in equity markets.”

Oil Bulls

The production cuts are bullish for oil and “will help to drive Brent faster back to $100 per barrel as global jet fuel demand revives,” Bjarne Schieldrop, chief commodities analyst at SEB AG. “It’s easy to cut when there is limited risk for loss of market share to US shale oil as growth there slows. More market power to OPEC+ and higher oil prices is the natural consequence of fading US shale oil growth.”