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The global economy appears to be entering a new phase, and the markets are changing accordingly. Rates and energy prices are being re-priced, affecting risk assets. Despite the fact that European rates had already begun to rise before to the ECB meeting, the reluctance to rule out a raise this year pushed the open door even farther wide. 

The stronger-than-expected January jobs report in the United States, as well as a substantial upward adjustment (709k) in the previous two months, bolstered expectations for rate rises. The market expects a nearly 45 percent possibility of a 50 basis point raise in March and about 145 basis points of tightening over the following year. Around 85 basis points of tightening were discounted at the end of last year.

The interest rate adjustment in Europe has also been considerable. Last week, benchmark 10-year rates jumped 19-45 basis points (Germany was the lower end of the range and Italy the upper). Two-year yields increased by 11-41 basis points (France was the lower end of the range and Italy the upper). The ECB has discounted around 60 basis points of rises in the swaps market over the next year, with a 10 basis point shift around mid-year. 

The recent rises in oil may be due to weather and certain geopolitical issues, but the underlying issue is the relatively low stocks and limited potential to boost output among most OPEC+ members.

Although oil companies nominally increased output by 400k barrels per day last month, this month, and expect to increase output by another 400k barrels per day next month, real output is far lower. Even Russian capacity looks to be nearing its limit. Investing has dried up. 

With oil prices approaching $90 per barrel, US shale output is certain to increase. Exxon has revealed ambitions to increase output from the Permian Basin by 25%. Chevron will increase output by 10% thanks to a much larger base. It’s unclear what price will prompt Saudi officials to reclaim their role as swing producer. It might be between $100 and $110 per barrel.

Similarly, the stock market is adjusting. The S&P It came to a halt around the retracement goal of (61.85). Between 4543 and 4544, there is a chasm. The NASDAQ rise came to a halt around the (50 percent) retracement point of this year’s downward leg, and it gapped lower on February 3. It made it to the other side of the chasm, but it couldn’t seal it. The distance between 14223 and 14264 is now nearly the same. In the middle of last week, Europe’s Stoxx 600 index held the (61.8 percent) retracement mark before dropping more than 2.6 percent in the final two days.