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Khatija Haque - Head of MENA Research
Published Date: 04 October 2018
US employment and services PMI data along with relatively hawkish Fed-speak helped push 2Y bond yields to their highest level in 10 years last night. The ADP (private sector) employment survey showed a gain of 230k jobs in September, well above market expectations for a 184k rise and also stronger than the August reading of 168k (which itself was revised higher). This bodes well for total non-farm payrolls data due tomorrow, with the market forecasting a rise of 184k jobs, and a further decline in the unemployment rate to 3.8%. The ISM non-manufacturing index also beat expectations, rising to 61.6 in September from 58.5 in August, with a 5.7 point jump in the employment component to the highest reading on record (62.4). The services data helped to mitigate slightly softer manufacturing survey data released earlier this week. In terms of Fed commentary, Chicago Fed President Evans said in an interview that interest rates should rise to above the ‘neutral’ level given the current upbeat outlook on the US economy and inflation. Fed Chairman Powell also noted that interest rates may rise above the neutral level but stressed that this was a long way away, and that the Fed would continue to move gradually while assessing data along the way.
Eurozone services PMI was confirmed at the flash reading of 54.7, but the UK survey was weaker than expected with the headline services PMI slipping to 53.9 from 54.3 in August. However, given the relative strength of manufacturing, the composite PMI was slightly better than forecast at 54.1. The highlight of the Conservative Party conference yesterday was Prime Minister May’s ‘Dancing Queen’ opening to her speech. There was little new on Brexit in the substance of her remarks, which focused on a post-EU economic program of increased investment in public services.
Turkish CPI far exceeded projections in September, rising 6.3% m/m and 24.5% y/y, compared to expectations of 3.4% and 21.1%. This is the fastest annualised rate of inflation since 2003, with prices driven sharply higher by the rapid depreciation of the lira this year. While finance minister Berat Albayrak predicted that the inflation would slow in October, attributing its rise to hoarders and speculators, PPI inflation was also very high last month, at 10.9% m/m and 46.2% y/y, suggesting that consumer prices could remain under pressure for several months, increasing pressure on the TCMB to further hike rates. The central bank implemented a 625 bps hike to the one-week repo rate in September, taking it to 24.00%, but with this latest CPI print, real rates are again in negative territory.
Source: Bloomberg, Emirates NBD Research
Treasuries closed lower following strong economic data and comments from Fed Chair Powell that the Federal Reserve may raise rates to levels beyond neutral. Yields on the 2y UST, 5y UST and 10y UST closed at 2.87% (+6 bps), 3.04% (+9 bps) and 3.18% (+12 bps).
Regional bonds closed flat despite moves in the USTs. The YTW on the Bloomberg Barclays GCC Credit and High Yield index remained flat at 4.44% while credit spreads tightened 8 bps to 147 bps.
The dollar rose for a sixth day on Wednesday, supported by 10-year treasury yields climbing as high as 3.20% after stronger than expected ADP employment data (see macro). As we go to print, the dollar index is currently trading at 96.059, and is on target to close above the 50-day moving average for a fifth day. While the index trades above this level, the path of least resistance is for further gains towards the 2018 highs of 96.984, with a daily close above this level signalling the possibility of further gains towards the 76.4% five year Fibonacci retracement of 97.940.
This morning’s underperformer is NZD, with NZDUSD currently trading 0.29% lower at 0.64954, below the 0.675 handle for the first time since February 2016.
Developed market equities closed marginally higher as economic data continued to be strong. The S&P 500 index and the Euro Stoxx 600 index added +0.1% and +0.5% respectively.
Regional equities closed higher. The DFM index (-0.8%) was an exception. Sipchem added +0.4% while Sahara Petchem added +3.6%. The company announced an all share merger with Sahara Petrochemicals.
Oil prices surged higher again overnight with Brent breaking above USD 86/b and WTI about USD 10/b below that. The gain comes despite a massive increase in US crude inventories of nearly 8m bbl last week and production staying above 11m b/d. Press reports also indicated that Saudi Arabia and Russia were preparing to increase production further although the scale of the increase remains in question.
Aluminium prices rose more than 4% yesterday on news that a major alumina smelter in Brazil would be shut down owing to an environmental dispute. Aluminium markets have already endured one phase of tightness in alumina earlier this year when the US imposed sanctions on Rusal.
FX Week: USD remains underpinned
Risk assets perform
U.S. Federal Reserve becomes more dovish
Dubai PMI: Slowest quarter since Q1 2016