BoE hikes by 50bp as expected

• Bank of England MPC members voted 8-1 to raise the Bank Rate by 50bp to 1.75%, in line with market expectations but the biggest hike in 27 years. The outsize (for the BoE) rate hike came despite downward revisions to the Bank’s growth forecasts, with the Bank’s now projecting a recession from Q4 2022 through to 2024. Nevertheless, the BoE now forecasts CPI peaking at over 13% y/y in Q4, largely on higher energy prices. In press interviews following the meeting, Governor Andrew Bailey reiterated his concerns about the tight labour market resulting in higher wages resulting in inflation becoming entrenched.
• In addition to raising rates, the MPC said it “provisionally” planned to start asset sales after the September meeting, which will further add to tightening of monetary conditions in the UK. The Bank expects its balance sheet to shrink by around GBP 80bn in the first year, with GBP 35bn of redemptions and GBP 10bn per quarter of gilt sales across the curve.
• The market interpreted the meeting as somewhat dovish, despite the higher inflation forecast, as the Bank dropped its reference to further rate increases in its statement and indicated it would make policy adjustments on a data-driven basis, and also because the Bank expects inflation to undershoot its 2% target over the medium term. We expect the MPC to raise rates to 3% by the end of Q1 2023.
• German factory orders declined by less than forecast in June, down -0.4% m/m and -9.2% y/y. The May reading was revised down however to -0.2% m/m from -0.1% previously. Higher prices and increased uncertainty about the outlook in Europe weighed on demand in June.
• Saudi Arabia recorded a budget surplus of SAR 77.9bn (USD 20.8bn) in Q2, as oil revenues surged almost 90% y/y. Non-oil revenue grew a more modest 3.5% y/y.  Current spending grew 11% y/y which included a sharp increase in subsidies and grants, while capital spending rebounded 64% y/y after contracting in 2021. Overall total spending grew 16% y/y. We expect the budget to record a surplus of 10.4% of GDP this year, following almost a decade of budget deficits.
• UAE private sector credit jumped 3.4% m/m and 6.9% y/y in May, the fastest annual growth since 2016. Most of this growth appeared to be in the retail segment of the market, which saw loan growth accelerate to 12.4% y/y in May. However, credit to business and industry has also recovered after contracting for most of last year, reaching 3.6% y/y in May. Deposit growth at banks accelerated to 8.8% y/y in May. Broad money supply growth rose to 7.5% y/y from 7.2% in April, the fastest growth since October 2020.

Today’s Economic Data and Events

• 08:30 RBI rate decision forecast +35bp to 5.25%
• 10:00 GE industrial production (Jun) forecast -0.3% m/m
• 16:30 US non-farm payrolls (Jul) forecast 250k
• 16:30 US unemployment rate (Jul) forecast 3.6%

Fixed Income

• Cleveland Fed president Mester added her voice to those of fellow monetary policy makers, saying that interest rates could need to rise to over 4% in order to cool demand and inflation. She also said she may favour front-loading rate hikes when the Fed updates its projections in September, but that this would depend on incoming data.
• US treasuries were broadly unchanged overnight with the US 10y yield closing down just 1bp at 2.69%. The 2s10s spread remains inverted and the deepest since 2000 as markets remain focused on recession concerns.

FX

• In an interview with Bloomberg, BoE governor Andrew Bailey said he was not concerned about the weakness in sterling this year, saying it was more of a “dollar strength” story. The pound has depreciated more than 10% against the greenback this year and weakened after the BoE hiked rates by 50bp yesterday, on the Bank’s downbeat growth forecasts. Bailey made it clear that policy makers do not target the exchange rate and that the pound was “not in crisis”.  
• The US dollar weakened a touch overnight but is trading higher this morning, with the Bloomberg USD index up 0.1% in Asia.  

Equities

• US equities had a mixed session yesterday with the S&P 500 closing down -0.1% while the Nasdaq 100 rose 0.4%. Both futures are trading higher in Asia this morning, as were the Euro Stoxx 50 futures.
• Local equities closed slightly lower yesterday with the DFMGI and the ADXGI down -0.5% and -0.3% respectively.

Commodities

• Oil traded lower yesterday, reaching levels last seen before Russia’s invasion of Ukraine in March, as slower global growth weighs on demand.  While OPEC+ indicated that it did not have much spare capacity, Libya has restored crude production this week which could see around 1mn b/d return to the market.
• Brent closed down -2.7% yesterday at USD 94.12/b but is trading a touch higher at USD 94.46/b this morning.

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