Global Flash PMIs mixed in February

• Flash PMI data released at the end of last week was mixed.  In the Eurozone, the manufacturing PMI rose to a higher than forecast 57.7 in February, indicating stronger growth in the sector while the services PMI slipped further to 44.7 from 45.4 in January as Covid-related restrictions on activity remained strict.  In the UK however, the preliminary services PMI rose to 49.7 in February from 39.5 in January, even as the third lockdown was extended into March. The UK’s manufacturing sector grew at a faster rate, with the flash PMI rising to 54.9 in February from 54.1 in January. 
• UK retail sales disappointed however, declining -8.8% m/m and -3.8% y/y in January as a result of the third lockdown.  However, consumer spending is expected to recover strongly once restrictions are eased.  The timing of this should become clearer this week with PM Johnson expected to outline a roadmap for exiting the lockdown in a speech today.  He is expected to say that all schools will reopen on 8 March and that after-school activities can restart then as well.  People may also be allowed to meet one-on-one outdoors, with groups of six allowed to gather from 29 March.  
• In the US, both the services and manufacturing PMIs remained firmly in expansion territory in February at 58.9 and 58.5 respectively as the daily rate of new coronavirus infections slowed and the vaccine rollout gained momentum.  However, labour market conditions remain soft, with initial jobless claims rising in the week to 13 February.    
• President Biden is scheduled to deliver his first State of the Union Address this week (most likely Tuesday), where he is expected to reiterate his support for the USD 1.9tn stimulus package proposed by the Democrats and where he may also outline a longer-term American Recovery Plan.  Separately, Fed Chairman Powell will deliver his semi-annual testimony to Congress on Tuesday and Wednesday this week.
• In Turkey, the central bank kept its benchmark one-week repo rate steady at 17.00% last week, as we had anticipated. The bank’s communiqué struck a fairly hawkish tone, noting the potential inflationary pressures posed by higher international food and commodity prices as well as still high levels of inflation expectations, and pledging that the ‘tight monetary policy stance will be maintained decisively… for an extended period until strong indicators point to a permanent fall in inflation and price stability.’ At 15.0% y/y in January, inflation overshot expectations. Nevertheless, the lira continues to benefit from the change in tone at the central bank since October, and the currency recorded its fifth weekly gain in a row last week, trading below USDTRY 7.0 for the first time since August.       
• Data from STR Global show hotel occupancy in Dubai slipped to 66% in January from 69% in December 2020, well below the 84% occupancy achieved in January 2020, before the coronavirus pandemic impacted global tourism. Revenue per available room declined -30% y/y in January.
• Dubai’s CPI fell -0.7% m/m and -4.4% y/y in January, the sharpest rate of annual deflation in a decade. Housing & utilities costs, which account for almost 44% of the consumer basket, fell -1.0% m/m and -8.8% y/y last month. Food prices, the second largest component of the CPI were flat m/m and up less than 1% y/y.  
• Saudi Arabia’s central bank has launched a new instant payment system for low value transactions within the kingdom.  The system, called Sarie, will allow transactions of under SAR 20k to be credited to the recipient immediately.

Today’s Economic Data and Events

• Germany IFO Expectations index, Feb: 13:00 forecast 91.7
• Germany IFO Current Assessment index, Feb: 13:00 forecast 89.1
• Germany IFO Business Climate index, Feb: 13:00 forecast 90.5
• US Leading Index, Jan: 19:00 forecast 0.4%
• US Dallas Fed Manufacturing Activity index, Feb: 19:30 forecast 5.0

Fixed Income

• Benchmark bonds extended losses last week even as equity market performance was less bullish and economic data has come in mixed for the start of the year. US Treasuries saw minimal change on the front end of the curve but heavy selling pressure on the longer end sent yields up sharply. Yields on the 2yr UST closed essentially unchanged at 0.1048% while the 10yr added almost 13bps and closed at 1.3364%.
• With the Treasury department intending to unwind its substantial cash position over the coming months short-term yields will remain anchored at low levels, contributing to a sharp steepening in the yield curve. Along with the gain in nominal 10yr yields, inflation-adjusted USTs have also seen their yields pop considerably in recent days, moving to -0.816% at the end of last week compared with more than -1% a week earlier.
• The bond market sell-off was near universal with European and Asian investment grade bonds falling. High-yield and USD emerging market bonds also sank as risk appetites are calibrated amid rising USD yields that could derail the recovery in many emerging markets. Yields on 10yr domestic currency bonds were universally higher in the EM space with Indian bonds adding almost 13bps to settle at 6.119%, South African yields adding 37bps to yield 8.877% and Turkish yields rising by 6bps to close at 12.645%.
• Fitch revised its outlook on Turkey's sovereign rating to stable from negative and affirmed the rating at "BB-' while S&P affirmed its sovereign rating on Iraq at 'B-' with a stable outlook.

 FX

• The dollar ended the week moderately lower, giving back some of the mid-week gains it managed on the back of a rise in UST yields. The DXY ended the week a little under 90.4, a 0.13% drop on the week. The performance of the EUR was a mirror image to the dollar, managing to recoup some mid-week losses and settling virtually unchanged at 1.2118.
• USDJPY added almost 0.5% on the week after having broken above the 106 level for the first time since October. GBPUSD was the standout gainer among the major pairs, adding another 1.2% to settle last week at 1.40. The UK’s success in vaccine rollouts is improving the outlook for growth even as near-term data shows the impact of lockdowns at the start of the year.
• Commodity currencies recorded a bounce in the second half of the week with AUD, NZD and CAD all gaining against the greenback.

Equities

• Following the risk-on tone of the previous week, global equity moves were more subdued last week, with mounting reflation concerns tempering some of the previous enthusiasm. In the US, both the S&P 500 (-0.3%) and the NASDAQ (-1.1%) closed down w/w, although the Dow Jones managed to eke out gains of 0.2% over the period.
• It was a similarly mixed story in Europe, where the DAX lost -0.4% w/w, while the CAC secured gains of 1.2%. In Italy the enthusiasm around Mario Draghi’s new government has seemingly waned as the FTSE MIB lost -1.2% w/w despite gains of 0.9% on Friday. In the UK, the FTSE 100 closed 0.5% higher w/w, despite the pound rising to three-year highs.
• It was generally a positive story in Asia, although Indian equities lost some ground following the extraordinary gains the previous week on the back of the expansionary budget announcement. The NIFTY closed -1.2% lower w/w. In Japan, the Nikkei rose 1.7% w/w, just about clinging on to the 30,000-plus levels despite a -0.7% decline on Friday.
• Within the region, the DFM lost -1.4% w/w, while the Tadawul gained 0.9%. In Egypt, the EGX 30 lost -1.4% w/w.

Commodities

• The rally in oil prices tempered a bit last week with Brent futures managing to record a gain of 0.8%, closing out at USD 62.91/b while WTI settled back below USD 60/b, a weekly loss of 0.4%. The easing of freezing weather conditions in Texas has helped production start to climb back, sinking prices toward the end of the week.
• Forward curves reflected the plateau in spot prices. Dec spreads for 2021/22 WTI closed at USD 3.43/b, down from a mid-week high of more than USD 4/b while the same spread in the Brent market is now back below USD 3/b.
• The Biden administration has said it was willing to meet with Iran to negotiate a return for both the US and Iran to return to the JCPOA. While Iranian leadership has said that sanctions relief must come first the step is nevertheless a shift in tone on Biden’s policy toward Iran, suggesting that the country could return to oil markets in a meaningful way sooner than expected.

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