Big week for central banks ahead

This week is an important one for central banks, with both the FOMC and the ECB expected to raise rates once again. US inflation data released on Friday showed that price pressures are not over yet, with the Fed’s preferred inflation measure, the core personal expenditures price index, up 4.6% y/y and 0.3% m/m, both in line with expectations. The headline reading was 4.2%, still more than double the Fed’s target rate of 2.0%. In other data, the employment cost index accelerated to 1.2% q/q, from 1.1% previously. Coming ahead of the FOMC meeting, there was nothing in the data to dispel the likelihood of a last 25bps hike.

The Eurozone narrowly avoided a technical recession as the bloc recorded real GDP growth of 0.1% q/q in Q1, missing expectations of a slightly stronger 0.2% expansion. The last quarter of 2022 saw a 0.1% contraction. On an annual basis, Q1 was up 1.3%, down from 1.8% y/y the previous quarter. Germany’s growth print was a key driver of the expectations miss as it came in at 0.0% q/q, missing projections of 0.2%. Following the 0.5% contraction in Q4, a technical recession could not have been closer for the Eurozone’s largest economy. France expanded 0.2%, in line with expectations.

Weak domestic demand has been a significant factor behind recent Eurozone weakness, with high inflation levels squeezing households and businesses. Preliminary April inflation data for Eurozone countries released on Friday suggest that elevated price growth remains a challenge, with France’s CPI inflation coming in at 5.9% y/y, up from the 5.7% seen in March, and Germany’s at 7.2%, down modestly from 7.4% previously. The aggregate Eurozone figure is due on May 2, two days before the ECB is scheduled to meet.

China's manufacturing PMI survey fell back into contractionary territory in April, coming in at 49.2. This is down from 51.9 the previous month and missed expectations of 51.4. This was the first sub-50.0 reading since zero-Covid restrictions ended in December. Non-manufacturing also slipped, to 56.4 from 58.2 previously, but remained strongly positive. 

The UAE has announced the new petrol fuel prices for May. Super 98 petrol will go up by 4.9% to AED 3.26/litre, Special 95 will rise by 5.2%, while Diesel will drop from AED 3.03 to AED 2.91.

Tourist arrivals in Turkey were up 12.3% y/y in March, with 2.34mn compared to 2.1mn the year previous. First quarter numbers were up 27% to 6.2mn in a positive for the country’s current account. The trade balance deficit fell to USD 8.3bn in March, compared with USD 12.1bn in February, with exports (4.4% y/y) growing faster than imports (3.4% y/y).

Egypt’s prime minister, Mostafa Madbouly, was speaking on Saturday, where he assured that ‘There is full coordination and commitment by the state to pay its obligations.’ Concerns around Egypt’s finances have been rising amidst a postponed IMF review. Madbouly also pledged to list a further 10 military-affiliated businesses, with asset sales a key component of Egypt’s reform plans.

Today’s Economic Data and Events

• 09:00 India manufacturing PMI, April
• 17:30 Canada manufacturing PMI, April
• 18:00 US ISM manufacturing, April. Forecast: 46.8

Fixed Income

• US Treasuries pulled higher at the end of the week, prompted by a slower than anticipated German inflation print for April. Yields on the 2yr UST dropped by 6bps to 4.0064% while the 10yr yield fell nearly 10bps to 3.422%. The FOMC sets policy this week with a 25bps hike about 80% of the way priced in. Markets are looking for the May hike to be the last from the Fed before a cutting cycle begins in July.
• European bonds also pulled higher as the slower inflation print lessens the odds that the ECB will need to hike rates by 50bps at their own monetary policy meeting this week. Yields on 10yr bunds fell 15bps on Friday to 2.308% while Italian 10yr yields dropped almost 18bps to 4.165%. In the UK, gilt yields also moved lower, down by 7bps at 3.712%.
• S&P revised their outlook on several Egyptian banks to negative from stable in the wake of revising the outlook on Egypt’s sovereign rating. All the banks had their ratings affirmed at ‘B’.
• Fitch affirmed their ‘BB+’ rating on Morocco with a stable outlook.

FX

• The drop in European yields seemed to weigh on EURUSD at the end of the week with the pair down slightly less than 0.1% to 1.1019 at the end of the week. Overall a mixed end of the week for currency markets ahead of this week’s FOMC. GBPUSD ended the day up 0.6% at 1.2567 while USDJPY moved against the yen, rising by 1.7% to 136.30.
• Commodity currencies also had a mixed session. USDCAD closed lower by about 0.3% to 1.3552 while AUDUSD fell 0.2% to 0.6615. NZDUSD added 0.6% to 0.6182.

Equities

• Equity markets had a somewhat volatile week last week, with sizeable intraday swings as risk sentiment was swayed by major earnings announcements and residual concern over banking sector stability.
• Asian markets largely closed the week positively, with the Nikkei gaining 0.3% w/w as dovish comments from the BoJ boosted equities at the back end of the week. The Shanghai Composite added 0.2% but the Hang Seng ended the week down 0.3%.
• There was less positivity in Europe, where banking stocks in particular weighed on the mood at times, but there was a late uptick on Friday which softened any losses. The DAX managed to end the week positively, up 0.3% w/w, but the CAC dropped 1.1% and the FTSE 100 0.6%. The composite STOXX 600 ended down 0.5%.

Commodities

• Oil futures ended the week on a stronger footing with June Brent expiring at USD 79.54/b, up 1.5% on the day. WTI futures added 2.7% on Friday to settle at USD 76.78/b. Both contracts fell for the week as a whole, however, as the macro narrative swung back to concerns over tightening central bank policy and weak growth.