Daily Outlook: US manufacturing disappoints

The IMF has upgraded its forecast for UAE growth to 2.9% in 2018 (2.0% previously) and 3.7% in 2019 (3.0% previously) on the back of higher expected oil production and increased government spending. We retain our forecasts of 2.2% this year and 3.6% in 2019. The Fund recognises that non-oil sector activity is relatively subdued currently.  For Dubai, the IMF expects growth to accelerate to 3.3% this year (in line with our own forecast) and 4.1% in 2019 (we expect 3.9% next year). 

Recent data released by the Saudi authorities show GDP growth accelerating to 1.6% y/y in Q2 on the back of stronger oil and non-oil sector growth.  The current account surplus in the second quarter also widened significantly to USD 19.2bn as higher oil prices boosted oil export revenues.

India and UK manufacturing PMI data was stronger in September, rising to 52.2 and 53.8 respectively.  The UK reading was above consensus forecasts, driven by growth in both domestic and foreign markets and higher employment.  However firms noted that Brexit uncertainty made it difficult to forecast future output.  Meanwhile, manufacturing survey data in the US was disappointing.  The ISM manufacturing index slipped to 59.8 from 61.8 in August, below market consensus.  The weakness was largely in the new orders component, while ‘prices paid’ also declined.  US construction spending in August also came in softer than forecast at 0.1% m/m. 

Eurozone manufacturing PMI was confirmed at 53.2 in September, marginally softer than in August.  However, German retail sales disappointed, declining -0.1% m/m in August against expectations of 0.5% rise.  Eurozone unemployment eased further to 8.1% in August, a new post-financial-crisis low.

The Reserve Bank of Australia is expected to keep rates on hold at 1.5% today despite strong GDP growth in H1 as concerns remain about the outlook for domestic demand. 

Fixed Income

News that a new version of NAFTA had been agreed between the US, Mexico and Canada helped to lift risk appetite generally and markets eased away from US Treasuries. Yields on the 10yr benchmark rose marginally and have trickled slightly higher this morning. The spread on 2-10yr Treasuries widened slightly to almost 26bps from 24bps at the end of last week. In Europe, Italy’s budget remains in focus on yields on 10yr paper there rose to 3.29% from 3.14% at the end of last week while bund yields pushed lower.

Following the merger of IPIC and Mubadala last year, Mubadala is now seeking to reorganize its debt under a single entity although there appears there will be no material change to the terms of bonds previously issued by IPIC.

In rating news, Moody’s has placed its ratings on Commercial Bank of Dubai on a review for a possible downgrade while Fitch lowered its ratings on 20 Turkish banks in light of the weakening Turkish economy.

Gulf CDS spread have narrowed further as Brent oil reached USD 85/b overnight.  Higher oil prices as well as increased oil production are set to boost budget revenues significantly, and budget deficits are set to narrow sharply next year.

FX

CAD outperformed yesterday after an announcement that the U.S, Canada and Mexico had agreed to replace NAFTA, ending concerns that the Canadian economy would slow on no resolution being found. On the news, the USDCAD opened significantly lower than Friday’s close and below the key support of 1.29 and continued to add to these losses, trading below the 1.28 handle for the first time since May 2018 before recovering some these losses. As we go to print, USDCAD is currently trading 0.10% lower at 1.2805 and on target to fall for a third consecutive day. With the market expecting the Bank of Canada to continue with an additional rate hike in 2018, we expect further short term strength from CAD and look for a retest of the support level at 1.2727, the May 2018 low. It is noteworthy that there is a risk that a break and daily close below this key level has the potential to lead to more significant declines towards the 1.25 levels last seen in the first two months of the year. 

Equities

The Dow Jones Industrial index rallied on news of the trade agreement between Canada and the US.  While the S&P 500 also rallied strongly at the open it gave up some of its gains by the end of the session.  European equities were generally firmer while most Asian markets were closed yesterday. 

Regional equity bourses had another positive day yesterday with Tadawul and DFM rising 0.5%, and ADX up 0.9%.  Higher oil prices and announcements of a larger federal government budget for 2019 likely contributed to the positive sentiment in the UAE.

Commodities

Oil markets continued to rally at the start of the week, pushing to above USD 85/b in Brent futures and more than USD 75/b in WTI. There were few new fundamental catalysts to support the rise though some more topside is to be expected as the market recalibrates ahead of US sanctions coming into place on Iran.

Market surveys of OPEC production showed that output from the bloc rose again in September by 90k b/d but production continued to decline in both Venezuela and Iran.

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