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Khatija Haque - Head of MENA Research
Published Date: 02 May 2019
The US Federal Reserve kept interest rates unchanged as expected yesterday, and maintained its neutral stance. At the post-meeting press conference, Chairman Powell said the Fed doesn’t see a strong case for moving rates in either direction. Growth was described as ‘solid’ and although the Fed noted that inflation has declined, this was ascribed to transitory factors. Powell also noted that that some of the global risks that had caused the Fed to adopt a more cautious stance at the start of this year appear to have moderated. US equities closed lower yesterday as the Fed dashed hopes that the next rate move would be a cut.
US economic data overnight was mixed, with the ISM manufacturing index declining to 52.8, well below forecasts and the lowest level since October 2016, signalling weaker growth in the manufacturing sector. New orders, employment and output all declined in April. The Markit US manufacturing PMI rose slightly to 52.6 last month. Seperately, private sector employment rose 275k in April, much higher than the 180k forecast and also stronger than the March reading. Non-farm payrolls data is due tomorrow, with the consensus estimate at 190k.
The Bank of England is expected to keep rates on hold today at 0.75%, amid continuing uncertainty over Brexit. Press reports this morning are suggesting that the Conservatives and Labour may be getting closer to a deal they can both support, after a month of talks. Local elections are taking place in the UK today, and while they will have no direct impact on parliament or Brexit negotiations, the Conservative Party is expected to face big losses.
Source: Bloomberg, Emirates NBD Research
Treasuries yields closed higher as the Fed Chair Jerome Powell stuck to a balanced tone and private sector job data came in stronger than expected. While the Federal Reserve left interest rates unchanged, the comments indicated that there is no bias to either tighten or ease monetary policy. The Chairman also said that inflation is possibly pulled down by ‘transitory’ factors. Yields on the 2y UST, 5y UST and 10y UST closed at 2.30% (+4 bps), 2.30% (+3 bps) and 2.50% (flat) respectively.
Regional bonds continued their positive run for a fourth consecutive trading session. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped 2 bps to 3.94% mainly as a result of 4bps tightening in credit spreads to154 bps on the back of rising oil prices.
The dollar index strengthened following the Fed’s decision to leave rates on hold and a neutral post meeting statement, as the market seemed to have been expecting a more dovish tilt.
GBP has rallied against the dollar on reports that the Conservatives and Labour may be closer to agreeing on a compromise Brexit deal.
Developed market equities closed lower amid mixed economic data and corporate earnings. The S&P 500 index dropped -0.8% and the Euro Stoxx 600 index declined -0.1%.
Regional markets were largely positive. The Tadawul added +0.6% to take its year to date gains to +19.6%. Aramex reported Q1 2019 earnings of AED 108mn (+4.0% y/y) after the market closed. The stock closed -1.5% lower.
Oil futures fell overnight as the market remains buffeted between two constraining forces. Brent crude fell 0.85% and WTI was down around 0.5% with both contracts edging lower this morning. Pushing down on prices was EIA data that showed in the US rose by almost 10m bbl last week and production broke to a new record of 12.3m b/d. Imports also pushed higher while refinery demand dipped. US stocks have gained almost 30m bbl since the start of the year while total oil and products inventories are almost 70m bbl higher than they were the same time last year.
Contrasting with the soft EIA data is persistent uncertainty in Venezuela on whether the country is on the precipice of severe disruption that could affect oil production. OPEC will be under sharp scrutiny in coming weeks on whether they move to extend their production cut agreement, as several ministers have indicated this week, or they raise output to compensate for declining production elsewhere. The OPEC news may not be shifting spot prices as much as the fundamentals data but time spreads still point to a relatively tight Brent market (1-2 month spreads are in backwardation of nearly USD 0.7/b).
Interest rates to remain in the spotlight
Slowdown showing up in Indian trade
Weakening global PMIs
Relative value in global sukuk
Synchronised central bank rate cuts