All eyes on US inflation today

With no major economic data released yesterday, market focus was on the continuing debt-ceiling negotiations in the US. Little substantive progress was made however, and talks will continue later this week. Encouragingly, Senate majority leaders indicated that the US would not default on its debt, but the House majority leader Kevin McCarthy was less positive after the meeting.

US small business sentiment, measured by the NFIB business optimism index, declined to its lowest level in over a decade in April, as expectations for weaker sales and future business conditions weighed on the index, on the back of higher inflation, tighter credit conditions and fears of recession. Firms surveyed indicated they were likely to investment less in equipment in the coming months on the softer outlook. Firms still reported difficulty in hiring given the tight labour market, with 45% of firms saying they could not fill vacancies last month and 40% reporting increased compensation.

The focus today will be on US inflation data, with both headline and core CPI expected to rise 0.4% m/m. The annual rates are likely remain largely unchanged from March, underlining the difficulty with reaching the Fed’s 2% inflation target. In comments to the Economic Club of New York, Fed President John Williams left the door open to further rate hikes but seemingly ruled out rate cuts over the rest of this year, saying he did not see any reason in his baseline forecast to cut interest rates this year.

In the UAE, Abu Dhabi’s National Oil Company (ADNOC) will offer 1.11bn shares in its Logistics & Services businesses next week, expecting to raise around USD 1bn. Listing is expected on 1 June on ADSE.

Aramco announced plans for an additional dividend which would increase its payout by more than USD 20bn according to Bloomberg. The dividend yield could rise to 4.2% and the management hopes the move will boost liquidity in the stock. The increased payment would benefit the largest shareholders – the Saudi government and the PIF – boosting funding for budget expenditure and investment projects.     

Today’s Economic Data and Events

• 10:00 GE CPI (April, final) forecast 0.6% m/m and 7.6% y/y
• 16:30 US CPI (April) forecast 0.4% m/m and 5.0% y/y
• 16:30 US core CPI (April) forecast 0.4% m/m and 5.5% y/y

Fixed Income

• US Treasuries traded in a limited manner ahead of the release of today’s CPI data. Yields on the 2yr UST pushed up by 2bps to 4.0221% while the 10yr closed slightly more than 1bps higher at 3.5186%. John Williams, president of the New York Fed, said that future FOMC decisions would be “based on that data,” referring to the flow of data points to be released before the June meeting. He also noted he saw no “reason to cut interest rates this year.”
• European bonds all closed with a softer footing with bund yields up 3bps to 2.345% while gilt yield added almost 8bps to 3.848% ahead of the upcoming Bank of England meeting.
• Moody’s revised their watch on Egypt’s sovereign rating to “negative” from a “stable” outlook. The ratings agency cited debt affordability issues and slow progress on privatization.

FX

• The US dollar gained against nearly all peers last night in line with a general risk-off move. EURUSD fell by 0.4% to 1.0962 while USDJPY moved marginally higher to 135.23. GBPUSD managed to hold steadier at 1.2621.
• Commodity currencies dropped across the board with USDCAD up by a bit less than 0.1% to 1.3384 while AUDUSD fell by 0.3% to 0.6762 and NZDUSD dropped by 0.1% to 0.6335.

Equities

• US equity markets fell on Tuesday as investors wait for April CPI data, due to be released on Wednesday morning. Sentiment about the prospects of a US debt ceiling deal also weighed on markets. The Dow Jones fell 0.2%, while the S&P 500 and the NASDAQ fell more sharply, ending the day 0.5% and 0.6% lower, respectively.
• European equity markets largely ended the day lower on Tuesday, with concerns about the real estate sector emerging, leaving the Eurostoxx 50 and CAC both down 0.6%. The FTSE 100 also edged lower on Tuesday, falling 0.2%, as investors wait for the BoE’s interest rate decision on Thursday.
• Locally, the DFM dropped 0.3% while the Tadawul added 0.4%.   

Commodities

• Oil prices kept their string of gains intact overnight with Brent up 0.6% at USD 77.44/b and WTI adding 0.8% to USD 73.71/b. The UAE’s energy minister said he was “not that worried” about oil in the near term, seeming to push back against the idea that a new round of OPEC+ cuts was needed.
• In the US, the API reported a build in crude stocks of 3.618m bbl last week while gasoline inventories also increased. Distillate stocks dropped by almost 4m bbl.