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Timothy Fox - Head of Research & Chief Economist
Published Date: 14 February 2019
U.S. CPI inflation data was flat m/m in January, while the core index rose by 0.2%. On a y/y basis however, headline inflation fell to 1.6% from 1.9% in December mostly on account of a sharp fall in energy prices, whereas excluding food and energy CPI was unchanged at 2.2%. The data gives the Fed room to ‘wait and see’ before deciding what to do next on interest rates, a point made by a number of Fed officials overnight.
Elsewhere, lower energy prices also caused inflationary pressures to slow in the U.K. in January with headline consumer price inflation reported at -0.8% m/m and 1.8% y/y compared with 0.2%m/m and 2.1% m/m in December. This fall has taken headline inflation below the Bank of England’s 2% target for the first time in 24 months. The same report indicated that core CPI remained unchanged during the same period at 1.9% y/y.
Further evidence that growth in the Eurozone slowed at the end of 2018 was provided by industrial production data showing a fall 4.2% y/y in December, following a 3.0% y/y decline the previous month. Analysis at the country level shows that this weakness was broad-based and will keep fears about the Eurozone’s vulnerability to a recession alive.
Meanwhile Japan's economy grew 1.4% q/q (SAAR) in Q4 following a 2.6% drop in Q3. The Q4 GDP gain was as-expected, as the temporary factors that hit Q3 GDP (typhoons and an earthquake) were unwound in Q4. Consumption bounced 0.6% after a 0.2% dip, exports climbed 0.9% in Q4 after a 1.4% drop in Q3, and business investment rose by 2.4%.
Finally China’s exports recovered sharply in January by 13.9% y/y and imports rising by 2.9%, leaving a trade balance in the month of RMB271.2bn. This strength is probably partly explained by the timing of the Lunar New Year, but it also provides U.S. trade negotiators with a timely tool with which to pressure China as the trade talks enter their critical phase.
Source: Bloomberg, Emirates NBD Research
Treasuries closed lower amid continued pick-up in risk assets. The curve shifted higher with yields on the 2y UST, 5y UST and 10y UST closing at 2.53% (+3 bps), 2.52% (+3 bps) and 2.70% (+2 bps) respectively.
Regional bonds continued to remain in a tight range. The YTW on the Bloomberg Barclays GCC Credit and High Yield index remained flat at 4.36% and credit spreads tightened 4 bps to 177 bps.
NZD outperformed on Wednesday in the aftermath of the RBNZ meeting. While the central bank kept interest rates at their record low level of 1.75%, policy makers revealed that no further cuts are expected and that the official cash rate is expected to stay 2019 to 2020. Over the course of the day, NZDUSD rose by 0.91% to close at 0.67975. This morning the price has risen an additional 0.47% and is presently trading at 0.68290. Of note is that after finding support at the 100-day moving average over the last few days (0.6729), yesterday’s break of the 50-dsay moving average (0.6787) looks like it will be sustained with the price currently above the 38.2% one-year Fibonacci retracement. This leads us to believe that a further climb towards the 50% one-year Fibonacci retracement of 0.6931 is a possibility.
Developed market equities closed higher on optimism over trade talks following reports that the US is considering extending the deadline. The S&P 500 index added +0.3% while the Euro Stoxx 600 index gained +0.6%.
Regional equities closed mixed. The DFM index added +0.3% while the Qatar Exchange lost -1.2%. Aldar Properties rallied +3.5% after recommending a higher than expected dividend pay-out.
Oil prices extended gains overnight, adding 1.9% in Brent and 1.5% in WTI. Markets have responded positively to the encouraging sentiment that a US-China trade deal could be reached thanks to a potential extension of talks beyond the deadline of the start of March.
EIA data still points to heavy levels of supply in the US. Production remains stuck at 11.9m b/d while crude inventories added 3.6m bbl last week, their highest level in the last year. Increases in gasoline, diesel and fuel oil stocks helped total petroleum and products stock rise 6.5m bbl. There was a sharp drop in product supplied and refinery utilization dropped in line with seasonal trends.
The IEA left its forecast for 2019 demand growth at 1.4m b/d in its latest oil market report while estimating that OPEC output fell 930k b/d in January thanks to adherence to the production cut deal. The agency also cautioned that while sanctions on PDVSA would disrupt flows out of Venezuela, the increase in supply alone from the US is more than all of Venezuela’s total output. The IEA’s estimate of the ‘call’ on OPEC is 30.7m b/d for 2019 compared with January production of 31.6m b/d.
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