Dubai CPI slows to 3.4% y/y in February

Inflation in Dubai eased to 3.4% y/y in February from 3.6% in January, but rose 0.5% m/m last month. Housing is still the main driver of inflation, up 0.5% m/m and 6.2% y/y, unchanged from January, while food inflation moderated to 3.1% y/y in February. Transport costs also increased on a monthly basis, likely on the back of higher petrol prices, but were still lower than February 2023, helping to offset inflation in other categories. With petrol prices up again in March, transport costs could once again contribute to overall inflation in the next couple of readings.

Saudi Arabia is considering setting up an AI focused investment fund of USD 40bn, according to a report by the New York Times. Officials are looking at a partnership with a Silicon Valley venture capital fund.

Germany’s ZEW survey showed an improvement in investor sentiment in March, with the expectations index rising to 31.7 from 19.9 in February and coming in higher than forecast. Lower inflation and stronger equity markets likely contributed to the improved outlook, along with the expectation that the ECB will start to cut interest rates in the coming months. Separate data from the Eurozone showed unit labour costs slowing to 3.4% y/y in Q4 2023 from 5.2% in Q3, although ECB officials will be waiting to see Q1 2024 wage growth data for confirmation that wage growth is indeed slowing.

US housing starts rose 10.7% m/m in February to 1521k, well above the median forecast of 1440k. Building permits also rose by a bigger than expected 1.9% m/m. Milder weather in February may have been a key factor in the rise in housing starts, but demand for homes in the US continues to outstrip supply despite high mortgage rates, encouraging more housebuilding.

The main focus today will be the FOMC meeting. While there is no expectation for a rate cut, markets will be watching the post meeting statement and press conference for clues about how policy makers are thinking about the timing and extent of rate cuts this year. New economic and interest rate projections will also be released.

Today’s Economic Data and Events

11:00 UK CPI (Feb) forecast 0.7% m/m and 3.5% y/y

11:00 UK core CPI (Feb) forecast 4.6% y/y

22:00 FOMC rate decision, forecast 5.5% upper bound

Fixed Income

• 2y treasury yields declined slightly on Tuesday, closing -5bp lower at 4.68%, ahead of today’s FOMC rate decision. 10y yields also fell -3bp to 4.29%. Most of the repricing in anticipation of a more hawkish dot plot happened last week and further upside in yields may be limited.
• Benchmark yields in Europe were mixed with 10y gilt and bund yields lower while yields in Eurozone periphery countries rose. Greece’s 10y bond yield rose 3.8bp to 3.4% with Italy’s up 2.3p to 3.7%.

FX

• The yen close above 150.5/ USD on Tuesday despite the decision by the Bank of Japan to start normalizing monetary policy. The rate increase to 0-0.1% was seen as a dovish hike, with policy expected to remain accommodative for some time, and another hike isn’t fully priced until Q4 2024.
• Most major currencies lost ground against the dollar on Tuesday. The USD index rose 0.2% with EUR down -0.5% and GBP losing -0.4% against the greenback.
• Commodity currencies also weakened with AUD down -0.9% to 0.6511 after the RBA decided to keep rates on hold and was more balanced in its outlook relative to prior meetings. NZD lost -0.8% against the dollar on Tuesday to close at 0.6045.

Equities

• US equity markets closed higher on Tuesday, led by the DJIA which rose 0.8%. The S&P500 closed 0.6% higher while the Nasdaq100 rose 0.3%. European equity indices were mostly green as well with the Eurostoxx50 up 0.5% and the FTSE100 up 0.2%. The Nikkei close 0.7% higher on Tuesday even after the BoJ raised its policy rate for the first time since 2007 and indicated it would stop purchasing ETFs. Markets in Japan are closed today for a holiday.
• Local markets closed lower yesterday with the ADXGI down -0.3% and the DFMGI down -0.1%. The Tadawul rose 0.3% on Tuesday.

Commodities

• Oil prices rose again on Tuesday with Brent up 0.6% to USD 87.38/b and WTI up 0.9% to USD 83.47/b. The API reported US crude inventories declined 1.5mn barrels last week. Separately, Kuwait said it is increasing the amount of heavy crude processed through its three refineries, to boost exports of the lighter Kuwait Export Crude. Kuwait has cut production by 260k b/d over the last year, in line with OPEC+ decisions to curb output.