OPEC+ unexpectedly announced on Sunday that the cartel will cut another 1.1 million barrels a day from production citing concern about market uncertainty. That is in addition to the 2 million barrels a day cut they agreed to last October. Consequently, crude oil prices rallied sharply higher on Monday, re-visiting its January highs.

Spiking crude prices renewed fears about inflation, something that global central banks have been fighting over the past year. Higher oil prices could cause inflation to remain sticky and would put the Federal Reserve in a tough spot.

This diminished hopes of an end to the Fed’s aggressive interest rate hikes, despite recent signs of slowing inflation and turmoil in the banking sector. The Fed has been trying to fight inflation with interest rate increases, but recent turmoil in the banking sector has tightened credit conditions.

Cracks in the financial system appeared last month as the lagged effects from a rapid succession of interest rates exposed some vulnerabilities. Unlike previous banking crises, this time, regulators appear to be on the front foot, providing emergency liquidity to prevent broader contagion. While these measures gave the banking system some reprieve, it’s too early to say if there won’t be more casualties.

Until Sunday, futures traders were split 50/50 if the Fed would hike rates by 25-basis point when it next meets on the 3rd of May, but as of Tuesday, the bets in favour of another 25-basis point rate increase at the next meeting have risen to 61%.

On Tuesday U.S. job openings, which measure labour demand, fell below 10 million for the first time since 2021 in February, signalling the labour market might have started cooling. Factory orders declined by 0.7% from a month earlier in February, suggesting that the economy could be cooling amid higher interest rates.

The Fed will have more economic data to consider this week, with the main focus shifting to the March nonfarm payroll report due on Friday. Amid the current macro backdrop is yet to be seen if the Fed would give priority price stability (the fight against inflation) or market stability (supporting the banking sector).