No relief for bruised markets as Fed signals higher rates for longer

NEW YORK, Sept 22 (Reuters) – A Federal Reserve dead-set on fighting inflation is leaving little hope that this year’s rocky markets will end anytime soon, as policymakers signal rates rises faster and higher than many investors were expecting.

The Fed lifted rates by an expected 75 basis points and signalled that its policy rate would rise by 4.4% by year end and top out at 4.6% by the end of 2023, a steeper and longer trajectory than markets had priced in.

Investors said the aggressive path suggests more volatility in stocks and bonds in a year that has already seen bear markets in both asset classes, as well as risks that tighter monetary policy will plunge the US economy into a recession.

“Reality is setting in for the markets as far as the messaging from the Fed and the continuation of this program to move rates higher to get rates into restrictive territory,” said Brian Kennedy, a portfolio manager at Loomis Sayles. “We don’t think we’ve seen the peak in yields yet given that the Fed will continue to move here and the economy is continuing to hold up.”

Kennedy’s funds continue to focus on short-term Treasuries and are holding “elevated” levels of cash as he expects yields on both short- and longer-dated bonds will rise between 50-100 basis points before peaking.

Stocks plunged following the Fed’s meeting, with the S&P 500 falling 1.7%. Bond yields, which move inversely to prices, shot higher with the two-year yield surging above 4% to its highest since 2007 and 10-year yields hitting 3.640%, the highest since February 2011. That left the yield curve even more inverted, a signal of looming recession.

The S&P 500 is down 20% this year, while US Treasuries have had their worst year in history. Those declines have come as the Fed has already tightened rates by 300 basis points this year.

“Riskier assets are probably going to continue to struggle as investors are going to hold back and be a bit more defensive,” said Eric Sterner, chief investment officer of Apollon Wealth Management.

Rising yields on US government bonds are likely to continue dulling the allure of stocks, Sterner said.

“Some investors may look at the equity markets and say the risk is not worth it, and they may shift more of their investments on the fixed income side,” he said. “We might not see as strong returns in the equity markets going forward now that interest rates have been somewhat normalized.”

Indeed, the average forward price-to-earnings multiple on the S&P 500 stood at around 14 in 2007, the last time the Fed funds rate was at 4.6%. That compares with a forward P/E of just over 17 today, suggesting stocks may have further to fall as rates rise.

“Powell is drawing a line in the sand and staying very committed to fighting inflation and is not as worried about spillover effects to the economy at this point,” said Anders Persson, chief investment officer of global fixed income at Nuveen. “We have more volatility ahead of us and the market will have to reset to that reality.”

THINKING ‘VERY CONSERVATIVELY’

Investors have piled into assets such as cash this year as they seek refuge from market volatility while also seeing opportunity to buy bonds after the market rout.

Many believe high yields are likely to make those assets attractive to income seeking investors in coming months. The shape of the Treasury yield curve, where short-term rates stand above longer-term ones, supports caution as well. Known as an inverted yield curve, the phenomenon has preceded past recessions.

“We’re trying to essentially determine where the curve is going,” said Charles Curry, managing director, senior portfolio manager of US Fixed Income at Xponance, who said his fund has been thinking “very conservatively” and owns more Treasuries than in the past.

Peter Baden, CIO of Genoa Asset Management and Portfolio Manager of US Benchmark Series, a collection of US Treasury ETF products, said higher yields at the short end of the Treasury yield curve were attractive. At the same time, rising recession risks also raised the allure of longer-dated bonds.

He likened Powell’s stand on inflation with that of former Fed Chairman Paul Volcker, who tamed higher consumer prices in the early 1980s by drastically tightening monetary policy.

“(Powell’s) saying we will do what it takes. They need to put the brakes on demand and put that back in line with supply. This is their Paul Volcker moment,” he said.

(Reporting by Davide Barbuscia and David Randall; Additional reporting by Megan Davies and Chuck Mikolajczak; Writing by Ira Iosebashvili; Editing by Megan Davies and Sam Holmes)

Oil edges higher on Russian supply concerns in volatile trade

Sept 22 (Reuters) – Oil settled nearly 1% higher on Thursday, paring earlier gains as the market focused on Russian oil supply concerns, rebounding Chinese demand, and as the Bank of England hiked interest rates less than some had expected.

Brent crude futures settled up 63 cents, or 0.7%, at USD 90.46 after rising by more than USD 2 earlier in the session.

US West Texas Intermediate (WTI) crude settled up 55 cents, or 0.7%, at USD 83.49, after rising by more than USD 3 earlier in the session.

Russia pushed ahead with its biggest conscription since World War Two, raising concerns an escalation of the war in Ukraine could further hurt supply.

“(Russian President Vladimir) Putin’s bellicose rhetoric is what’s propping up this market,” said John Kilduff, partner at Again Capital LLC in New York.

Supply constraints from the Organization of the Petroleum Exporting Countries (OPEC) added further support, analysts said.

“OPEC crude exports have leveled off from a strong increase at the start of this month,” said Giovanni Staunovo, commodity analyst at UBS.

The European Union is considering an oil price cap, tighter curbs on high-tech exports to Russia and more sanctions against individuals, diplomats said, responding to what the West condemned as an escalation in Moscow’s war in Ukraine.

The European Securities and Markets Authority (ESMA) is also considering a temporary break on energy derivatives as prices have risen following Russia’s invasion of Ukraine in February.

The parameters of such a mechanism should be set at the EU level to apply to all platforms that trade energy derivatives, it said.

Crude oil demand in China, the world’s largest oil importer, is rebounding, having been dampened by strict COVID-19 restrictions.

The Bank of England raised its key interest rate by 50 basis points to 2.25% and said it would continue to “respond forcefully, as necessary” to inflation.

The rate hike was “less than markets had been pricing and defying some expectations that UK policymakers might be forced into a larger move,” ING bank said.

Turkey’s central bank unexpectedly cut its policy rate by 100 basis points to 12%, when most central banks around the world are moving in the opposite direction.

Following the US Federal Reserve’s hefty 75 bps rise on Wednesday, rate increases also came thick and fast from the Swiss National Bank, Norges bank and Indonesia’s central bank, and the South African Reserve Bank.

Interest rate hikes to quell inflation have weighed on equities, which often move in tandem with oil prices. Rate increases can curb economic activity and demand for fuel.

“This just shows how synchronized this current tightening cycle is,” Deutsche Bank said.

(Additional reporting by Rowena Edwards in London, Muyu Xu in Singapore; Editing by Kirsten Donovan, David Gregorio and Marguerita Choy)

Wall Street slumps as investors absorb hawkish Fed rate message

Sept 21 (Reuters) – Wall Street’s main indexes see-sawed before slumping in the final 30 minutes of trading to end Wednesday lower, as investors digested another supersized Federal Reserve hike and its commitment to keep up increases into 2023 to fight inflation.

All three benchmarks finished more than 1.7% down, with the Dow posting its lowest close since June 17, with the Nasdaq and S&P 500, respectively, at their lowest point since July 1, and June 30.

At the end of its two-day meeting, the Fed lifted its policy rate by 75 basis points for the third time to a 3.00-3.25% range. Most market participants had expected such an increase, with only a 21% chance of a 100 bps rate hike seen prior to the announcement.

However, policymakers also signaled more large increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023. This is up from projections in June of 3.4% and 3.8% respectively.

Rate cuts are not foreseen until 2024, the central bank added, dashing any outstanding investor hopes that the Fed foresaw getting inflation under control in the near term. The Fed’s preferred measure of inflation is now seen slowly returning to its 2% target in 2025.

In his press conference, Fed Chair Jerome Powell said US central bank officials are “strongly resolved” to bring down inflation from the highest levels in four decades and “will keep at it until the job is done,” a process he repeated would not come without pain.

“Chairman Powell delivered a sobering message. He stated that no one knows if there will be a recession or how severe, and that achieving a soft landing was always difficult,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Higher rates and the battle against inflation was also feeding through into the US economy, with the Fed’s projections showing year-end growth of just 0.2% this year, rising to 1.2% in 2023.

“Markets were already braced for some hawkishness, based on inflation reports and recent governor comments,” said BMO’s Ma.

“But it’s always interesting to see how the market reacts to the messaging. Hawkishness was to be expected, but while some in the market take comfort from that, others take the position to sell.”

The Dow Jones Industrial Average fell 522.45 points, or 1.7%, to 30,183.78, the S&P 500 lost 66 points, or 1.71%, to 3,789.93 and the Nasdaq Composite dropped 204.86 points, or 1.79%, to 11,220.19.

All 11 S&P sectors finished lower, led by declines of more than 2.3% by Consumer Discretionary and Communication Services.

Volume on US exchanges was 11.03 billion shares, compared with the 10.79 billion average for the full session over the last 20 trading days.

The S&P 500 posted two new 52-week highs and 70 new lows; the Nasdaq Composite recorded 44 new highs and 446 new lows.

(Reporting by Medha Singh, Devik Jain and Ankika Biswas in Bengaluru and David French in New York; Editing by Marguerita Choy)

Keep your hiking boots on

Sept 22 (Reuters) – Investors in Asia could be waking up to more volatility after the Federal Reserve’s latest jumbo rate increase and message about future hikes.

The US central bank on Wednesday raised rates by 75 basis points for a third straight meeting as it is bent on taming the steepest surge in inflation in 40 years. That action was largely expected but may have offered some relief after markets had priced in a small chance of a mammoth 100-basis point hike.

Instead, it was what comes next that appeared to seize the market’s attention. Another 125 basis points in hikes are now signalled for the last two meetings of 2022, with investors bracing for more to come early next year. New Fed projections show its policy rate topping out at 4.60% in 2023.

In his press conference following the Fed’s statement, Chair Jerome Powell said achieving a soft landing for the economy is “very challenging.” Policymakers see the need to lift the policy rate to a “restrictive level” and “keep it there for some time,” Powell added.

Already-harried markets had trouble agreeing on a direction in the hours following the Fed’s decision and Powell’s ensuing comments.

Two-year US Treasury yields burst well above 4% in the immediate aftermath of the Fed’s statement but then eased closer to that level. Stocks dove, recovered, and then slid again, with the benchmark S&P 500 ending down 1.7%. The dollar index hit a fresh two-decade high, then edged back.

Digesting the Fed may take longer, as initial reactions to the central bank’s meetings can be misleading. What’s more, investors on Thursday will have other central bank actions to contend with, including in Japan, England and Switzerland.

Key developments that could provide more direction to markets on Wednesday:

Bank of Japan monetary policy decision

Taiwan, Indonesia central bank meetings

Bank of England policy decision

Swiss National Bank monetary policy meeting

(Reporting by Lewis Krauskopf in New York; Editing by Sandra Maler)

Once-bitten markets are ignoring Putin’s warnings again at their own peril

LONDON, Sept 21 (Reuters) – Earlier this year, markets were complacent as Russia massed troops on the Ukraine border. Now, they’re once again largely shrugging off Vladimir Putin’s signal that he could be prepared to use nuclear weapons.

World shares weathered an early knock to risk appetite on Wednesday after Putin mobilized more troops for Ukraine and threatened to use all of Russia’s arsenal against what he called the West’s “nuclear blackmail” over the war there.

It was Russia’s first such mobilization since World War Two and signified a major escalation of the war, now in its seventh month.

And while safe-haven assets such as the dollar, which hit a two-decade high against other major currencies, and government bonds in Germany and the United States rallied, stock markets appeared not to be too disturbed.

European stocks pared earlier falls and mostly rose, while the main indexes on Wall Street — already bracing for another aggressive hike in US interest rates later in the day — opened higher on Wednesday.

“Back in January and February when Russian troops were mobilized, market participants wrongly interpreted it as a bluff to increase Putin’s negotiating leverage, but then Putin exceeded expectations by going for a full invasion of Ukraine,” said Tina Fordham, an independent geopolitical strategist and founder of Fordham Global Foresight.

“The most significant aspect of what markets are not pricing in now is the potential for Russia to use an unconventional weapon, meaning a tactical chemical or a nuclear weapon,” she adding, noting that Putin had made some menacing remarks to this effect about the “wind blowing”.

Fordham said that while Putin would likely stop short of a full blown unconventional attack, it was very much in his “playbook” to cause maximum instability.

The MSCI World Stock Index is down 21% this year and Europe STOXX 600 index has lost 16% — both are poised for their worst year since 2008, when the global financial crisis unfolded.

Russia’s invasion of Ukraine, initially perceived as an outlier event, has dealt an extra blow to world markets that are still adjusting to a period of decades-high inflation and a sharp rise in borrowing costs from the likes of the Federal Reserve and European Central Bank.

Europe in particular has suffered, as Russia has choked off gas supplies, driving energy prices up in a squeeze on consumers and companies that has raised the risk of recession.

Germany’s and Italy’s reliance on Russia has made their stock markets among the world’s worst performers this year. Those close to the fighting, including Poland and Hungary, have also seen their local markets pummeled. Investors have ditched the bonds of countries with high gas or wheat import bills too.

Chris Weafer, chief executive of Macro-Advisory, a consultancy that advises companies on doing business in Russia, said Moscow was preparing for a long conflict, including continued throttling of energy supplies, and that it could better afford the confrontation than Europe.

“There had been a sense in Europe that Russia would look for a compromise. Today’s announcement makes it clear that is incorrect,” he said. “Russia is digging in for the long haul. They are prepared to tough it out.”

Arne Petimezas, a senior analyst at AFS Group in the Netherlands, said Putin was being underestimated.

“He has escalated every time. For him, it is life and death. I don’t see why his next move will be de-escalation unless he wins,” Petimezas said.

(By Dhara Ranasinghe and John O’Donnell; Additional reporting by Yoruk Bahceli in Amsterdam and Marc Jones in London, Editing by William Maclean)

Gold bounces over 1% as yields retreat post Fed verdict

Sept 21 (Reuters) – Gold prices rebounded on Wednesday as Treasury yields retreated after the US Federal Reserve hiked interest rates by an expected 75 basis points.

Spot gold was 0.7% higher at USD 1,673.86 per ounce by 4:12 p.m. EDT (2011 GMT), rising over 1% earlier.

US gold futures settled up 0.3% at USD 1,675.70.

The Federal Reserve raised its target interest rate by three-quarters of a percentage point, and signaled more increases.

“The (gold) market quickly realized that the rate hikes and more importantly, the expected path of rate hikes was well-factored into market prices… we subsequently have seen a significant bounce back off those lows,” said David Meger, director of metals trading at High Ridge Futures.

Prices, which were hovering near their lowest in over two years, initially moved lower after the statement but swiftly reversed course to climb over 1%.

Bullion’s gains came despite a stronger dollar, while benchmark 10-year US Treasury yields retraced from their highs.

“The move lower in yields has supported the bounce in gold post FOMC meeting,” Standard Chartered analyst Suki Cooper said.

“It is possible we could see some short covering activity amid a relief rally, but the hawkish commentary is set to keep gold prices on their longer-term downtrend,” Cooper added.

The Fed’s new projections showed policy rate rising to 4.4% by the end of this year, and to 4.6% in 2023.

Rate hikes to fight soaring inflation tend to raise the opportunity cost of holding zero-yield bullion.

“While price action could indicate that gold may have established a short-term bottom at USD 1,655, the upside will remain a challenge given a clear message from the Fed that rate hikes are emphatically not done,” said Tai Wong, a senior trader at Heraeus Precious Metals in New York.

Latching on to gold’s run, spot silver gained 1.4% to USD 19.57 per ounce.

Platinum lost 1.6% to USD 907.79 and palladium fell 1.1% to USD 2,143.82.

(Reporting by Kavya Guduru in Bengaluru; Editing by Shailesh Kuber)

Gold regains some momentum on latest Russia jitters; focus on Fed

Sept 21 (Reuters) – Gold rose on Wednesday after Russian President Vladimir Putin’s partial mobilisation announcement re-ignited some safe-haven interest in bullion, although a strong dollar and expected US rate hikes capped gains.

Spot gold was up 0.5% at USD 1,670.57 per ounce as of 0803 GMT. US gold futures rose 0.6% to USD 1,680.40.

Putin said he had signed a decree on partial mobilisation beginning on Wednesday, saying he was defending Russian territories and that the West wanted to destroy the country.

“The increased mobilisation, the escalation in that region and fears of escalation in terms of the weapons that are used will be driving a fair factor behind gold to some extent,” said independent analyst Ross Norman.

“However, obviously we’ve got dollar strength… and a widely predicted 75 basis points increase in the Fed funds rate which hasn’t helped gold particularly in recent times.”

But gold’s gains were kept in check as investors also sought refuge in the dollar, which scaled a fresh two-decade high versus a basket of other currencies, making bullion more expensive for overseas buyers.

Focus remained on the Fed’s policy decision due at 1800 GMT, with traders pricing in an 81% chance of another 75 basis-point rate hike and a 19% probability of a 100 bps increase.

While gold is considered a safe investment during political and financial uncertainties, rising rates dull its appeal since it yields no interest.

Reflecting sentiment, holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust GLD, on Tuesday registered their biggest one-day outflow since July 18.

“It seems unlikely that gold ETF inflows will sustainably rebound until traders crystalise a turn in the Fed tightening cycle and/or there is consensus on a US/global recession,” Citi Research said in a note.

Spot silver edged 0.2% higher to USD 19.34 per ounce, platinum gained 0.3% to USD 924.56, while palladium eased 0.2% to USD 2,163.75.

(Reporting by Brijesh Patel in Bengaluru; editing by Jason Neely)

Japan’s Nikkei ends at 2-month low with Fed, BOJ meetings in focus

By Sam Byford

TOKYO, Sept 21 (Reuters) – Japanese stocks notched their lowest close in more than two months on Wednesday, tracking declines on Wall Street and amid broader Asian peers, as investors braced for key policy meetings this week from the U.S. Federal Reserve and the Bank of Japan.

The Nikkei share average .N225 settled 1.36% lower at 27,313.13, its lowest closing level since July 19.

The broader Topix .TOPX fell 1.36%, marking its weakest close since Sept. 7.

“If the Fed implements a 75-basis-point rate hike, as most people expect, the market should avoid upheaval,” said Yasushi Yokoyama of Aizawa Securities, adding that investors are already looking towards the next hike. FEDWATCH

The Bank of Japan, however, is considered unlikely to stray from its dovish path. It is the only major central bank not to have hiked interest rates this year, even though inflation has stayed above the bank’s 2% target for five months straight.

“The upward price pressures are heavily biased toward food so far, and we thus believe that this August acceleration will not prompt a BoJ policy change,” JP Morgan economist Yuka Mera wrote in a research note.

“For monetary policy adjustment, the BoJ will need to see a broadening of price pressures, especially in services and wage inflation.”

Japanese government bond yields rose ahead of the central bank meetings, with the 5-year note JP5YTN=JBTC adding 1 basis point to reach 0.060%. Earlier in the day, the yield rose to 0.065%, its highest since June.

The BOJ made unscheduled offers to buy various JGBs in the morning, but the response was muted and the benchmark 10-year note JP10YTN=JBTC remained untraded with the yield last at 0.25%, the BOJ’s implicit policy cap.

The yen JPY=EBS was trading slightly lower at just below 144 to the U.S. dollar, within range of a 24-year historical low.

The Nikkei index saw 187 of its 225 constituents drop in the morning session, while 37 gained and one traded flat.

Air conditioner manufacturer Daikin Industries Ltd 6367.T weighed on the index the most with a 3.94% slump.

Japan Steel Works Ltd 5631.T was the best performer, rising 4.11% despite the company lowering its profit forecast for the current fiscal year.

Energy and financials were the only sectors to gain overall.

(Reporting by Sam Byford and Tokyo markets team; Editing by Devika Syamnath)

((Sam.Byford@thomsonreuters.com;))

What’s inside China’s toolbox to rein in excess yuan weakness?

SHANGHAI, Sept 21 (Reuters) – China’s yuan is facing renewed downward pressure, dragged lower by a surging US dollar, a hawkish Federal Reserve and widening monetary policy divergence between the world’s two largest economies.

The yuan has lost about 4% to the dollar since mid-August to weaken past the psychologically important 7 per dollar level. The local currency also looks set for the biggest annual loss since 1994, when China unified official and market exchange rates.

The rapid yuan declines prompted the People’s Bank of China (PBOC) to lower the amount of foreign exchange financial institutions must hold as reserves to rein in weakness.

WHAT ELSE HAS PBOC DONE SO FAR TO SLOW THE YUAN’S DECLINE?

The PBOC has been setting firmer-than-expected daily yuan midpoint fixings since late August to prevent excess yuan weakness, as the onshore spot yuan can only trade in a 2% narrow range around the midpoint.

Market participants take any significant discrepancy between market projections of what the fix might be and where the PBOC actually sets it as an indication of which way the central bank wants to tug the market.

Senior officials from the central bank and FX regulator have also ramped up efforts warning the market of strong one-way bets against the local currency through verbal messages.

Wang Chunying, spokesperson of the State Administration of Foreign Exchange (SAFE), was quoted by the state broadcaster CCTV last week urging companies not to speculate on the currency.

WHAT OTHER OPTIONS DOES PBOC HAVE, OTHER THAN OUTRIGHT INTERVENTION?

HIGHER TRADING COST

The PBOC could make it more expensive for financial institutions to short the yuan in derivatives markets, by raising their foreign exchange risk reserve ratio when purchasing dollars through forwards.

The central bank has adjusted the risk reserve requirements multiple times over the past few years before it scrapped it in October 2020, when the yuan rose sharply.

TIGHTER OFFSHORE LIQUIDITY

The central bank could issue yuan-denominated bills in Hong Kong to withdraw yuan from the offshore market and raise the cost of betting against the Chinese unit.

“The Chinese authorities are leaving no doubt about their resolve to dampen depreciation pressure on the yuan,” said Khoon Goh, head of Asia research at ANZ.

“If depreciation pressure remains, the PBOC could raise the reserve requirement for forwards to 20%, or increase yuan bill issuance in Hong Kong to make it more expensive to short the offshore yuan.”

COUNTER-CYCLICAL FACTOR IN YUAN’S DAILY GUIDANCE FIX

The PBOC first introduced the counter-cyclical factor to its daily midpoint fixing formula for the yuan-dollar exchange rate in 2017.

The regulators said the factor was an effort to better reflect market supply and demand, lessen possible “herd effects” in the market and help the market focus more on macroeconomic fundamentals. The central bank adjusted the methodology a few times before suspending it in October 2020.

“We do not expect an official restoration of the counter-cyclical adjustment factor in its daily fixing until the valuation of the CNY become much cheaper,” Becky Liu, head of China macro strategy at Standard Chartered, said in an note published earlier this month.

Liu expects the PBOC to further lower the FX reserve requirement ratio by another 200 basis points.

The yuan has weakened nearly 10% against the dollar so far this year, but its value against major trading partners .CFSCNYI only fell about 0.7% year-to-date.

HIGHER CROSS-BORDER INFLOWS

Regulators could adjust a parameter on cross-border corporate financing under its macroprudential assessments to limit domestic firms’ ability to seek overseas funding.

“The yuan exchange rate level itself is not the most important, the nature of the issue is whether China’s cross-border capital flows remain stable,” said Zhong Zhengsheng, chief economist at Ping An Securities.

(Reporting by the Shanghai Newsroom; Editing by Vidya Ranganathan and Sam Holmes)

Oil prices surge more than 2% as Putin mobilises more troops

SINGAPORE, Sept 21 (Reuters) – Oil jumped more than 2% on Wednesday after Russian President Vladimir Putin announced a partial military mobilisation, escalating the war in Ukraine and raising concerns of tighter oil and gas supply.

Brent crude futures rose USD 2.28, or 2.5%, to USD 92.90 a barrel by 0707 GMT after falling USD 1.38 the previous day.

US West Texas Intermediate crude was at USD 86.16 a barrel, up USD 2.22, or 2.6%.

Putin said he had signed a decree on partial mobilisation beginning on Wednesday, saying he was defending Russian territories and that the West wanted to destroy the country.

The escalation will lead to increased uncertainty over Russian energy supplies, said Warren Patterson, head of commodities research at ING.

“The move could possibly lead to calls for more aggressive action against Russia in terms of sanctions from the west,” he said.

Oil soared and touched a multi-year high in March after the Ukraine war broke out.

European Union sanctions banning seaborne imports of Russian crude will come into force on Dec. 5.

“It seems like a knee-jerk reaction to a sliver of news and would be liable to further recalibration in the coming hours,” said Vandana Hari, founder of Vanda Insights in Singapore.

Meanwhile, the United States said that it did not expect a breakthrough on reviving the 2015 Iran nuclear deal at this week’s U.N. General Assembly, reducing the prospects of a return of Iranian barrels to the international market.

The OPEC+ producer grouping – the Organization of the Petroleum Exporting Countries and associates including Russia – is now falling a record 3.58 million barrels per day short of its production targets, or about 3.5% of global demand. The shortfall highlights the underlying tightness of supply in the market.

Investors this week have been bracing for another aggressive interest rate hike from the US Federal Reserve that they fear could lead to recession and plunging fuel demand.

The Fed is widely expected to hike rates by 75 basis points for the third time in a row later on Wednesday in its drive to rein in inflation.

Meanwhile, U.S. crude and fuel stocks rose by about 1 million barrels for the week ended Sept. 16, according to market sources citing American Petroleum Institute figures on Tuesday.

US crude oil inventories were estimated to have risen last week by around 2.2 million barrels in the week to Sept. 16, according to an extended Reuters poll.

The head of Saudi state oil giant Aramco 2222.SE warned on Tuesday that the world’s spare oil production capacity may be quickly used up when the global economy recovers.

(Reporting by Yuka Obayashi, Isabel Kua and Florence Tan; Editing by Kenneth Maxwell, Ana Nicolaci da Costa and Kim Coghill)

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