BoE rate hike accompanied by dovish tone

The Bank of England raised the Bank Rate by 50bps at its first MPC meeting of the year, taking policy rates to 4.5%. There was greater consensus on the vote this time, with 7 MPC members voting in favour of the 50bps hike and 2 voting for no change. In its statement accompanying the move, the BoE said it would no longer “forcefully” respond to price pressures and that it would tighten further if there was “evidence of more persistent price pressure.” That gave the hike a dovish tilt as the UK faces a weak economic outlook. The BoE projects a recession of 0.5% in 2023 and 0.25% in 2024. The bank next meets toward the end of March with markets seeing a 25bps hike as the most likely outcome.

The European Central Bank also hiked rates by 50bps, taking the deposit facility rate to 2.5%, its highest since 2008. Unlike the BoE, however, the ECB gave little room for dovish interpretation of its next moves. In its statement, the ECB said it plans to hike by 50bps again in March and that it will “evaluate the subsequent path” for future moves. In somewhat similar messaging to the Fed, the ECB plans to keep rates at an elevated level for some time to deal with inflation while ECB president Christine Lagarde noted that conditions would need to be “extreme” in order for the ECB to step down to a 25bps move at its March meeting.

The Central Bank of Egypt surprised yesterday as it kept its benchmark interest rates on hold, leaving the overnight deposit rate at 16.25%. Consensus projections had been for a 100bps move higher following on from the 300bps hike in December given accelerating inflation (21.3% y/y in December) and pressures on the EGP in the new ‘durably flexible exchange rate regime’ that has been in place since the new IMF deal was agreed at the close of October. The bank reasoned that it had front-loaded its interest rate hikes in 2022 (with a cumulative 800bps over the year) and that it was prudent to assess the lagged effect of this tightening before raising rates once more.

US initial jobless claims fell by 3k in the week ending January 28 to a total of 183k. That was the fourth decline in the past five weeks, sending further encouraging messages about the resilience of the labour market to the economic slowdown underway and tighter interest rates. The January nonfarm payrolls report will be released later this evening and market expectations are for job growth of 190k and a stabilization in wage growth.

The Caixin services PMI showed an improvement in January to 52.9, up from 48 a month earlier and beating expectations as China’s reopens from strict Covid-19 measures. Employment also improved to 49.3 though has been in contraction territory for three months.

ADNOC has signed agreements with 23 UAE and international companies to boost manufacturing in the UAE. The agreements will mean critical products that ADNOC procures will be made in the UAE, and the deals are reportedly worth AED 17bn. In addition to growing the local manufacturing sector, the moves will strengthen supply chains.

Ayman AlSayari has been appointed governor of the Saudi Central Bank, replacing Dr Fahad Bin Abdullah who has been appointed as an advisor at the Royal Court. Dr AlSayari was deputy governor of SAMA.

Today’s Economic Events and Data

• 09:00 IN Composite PMI Jan
• 11:00 TU CPI y/y Jan: forecast 53.8%
• 17:30 US nonfarm payrolls Jan: forecast 189k

Fixed Income

• US Treasuries extended their post Fed rally overnight although the moves were relatively contained. Yields on the 2yr UST settled with a downward bias but near unchanged at 4.1042% while the 10yr UST yield fell 2bps to 3.3927%.
• European bonds failed to take the ECB at their hawkish word with substantial rallies across Eurozone bonds. Yields on 10yr German bund dropped 21bps to 2.067% while French yields closed almost 24bps lower at 2.51% and Italian 10yr yields fell almost 40bps to 3.89%. Gilt yields moved in sympathy and in reaction to the more dovish tone from the Bank of England with a 30bps drop to 3%.

FX

• Markets seemed to balk at the hawkish talk from the European Central Bank, discounting the prospect of policy rates going and staying much higher. EURUSD fell 0.7% overnight to settle at 1.091, erasing much of the single currency’s post-FOMC moves. Sterling endured a similar fate with a 1.2% drop to 1.2225 as markets seized on the BoE’s dovish tilt. Elsewhere, USDJPY remained in favour of the yen with a 0.2% drop to 128.68.
• Commodity currencies settled lower overnight, giving up much of their post Fed moves. USDCAD rose by 0.2% to 1.3316 while AUDUSD fell by 0.8% to 0.7077 and NZDUSD sank by 0.5% to 0.6476.

Equities

• Positivity around big tech led to an extension of the post-FOMC gains in US equity markets yesterday, with the tech-heavy NASDAQ in particular performing strongly. It closed up 3.3%, while the S&P 500 added 1.5%, but the blue chip Dow Jones ended the day 0.1% lower.
• In Europe, the ECB meeting was taken as a dovish hike, leading to strong gains in the composite STOXX 600 index which ended the day up 1.4%. The CAC added 1.3% and the DAX 1.4% while the UK’s FTSE 100 ended the day 0.8% higher.
• Locally, the ADX added 0.1% and the DFM 0.5%. Saudi Arabia’s Tadawul ended the day down 0.8% and the EGX 30 lost 0.9% ahead of the CBE’s first interest rate decision of the year.

Commodities

• Oil prices dropped again overnight, taking Brent to five days in a row of declines and WTI down two days running. Brent futures settled at USD 82.17/b, down 0.8% while WTI fell by 0.7% at USD 75.88/b.
• Russia’s production of oil in January was roughly stable at about 10.9m b/d, down by about 80k b/d month/month. Russia has been able to route exports to markets in Asia to compensate for the blocked access to markets in Europe.