US PCE disinflation slowed in February

The headline PCE inflation metric, the Fed’s preferred measure of inflation, came in at 2.5% y/y in February, in line with expectations and up modestly from 2.4% in January. The core measure was 2.8%, down from 2.9% previously, while both were up 0.3% m/m. Fed Chai Jerome Powell gave a cautious welcome to the data, saying that it showed that the disinflationary path was sometimes ‘bumpy.’ Encouragingly for the Fed, personal incomes rose 0.3% m/m, down from 1.0% in January and lower than the predicted 0.4%. Meanwhile, personal spending data came in stronger than expected, up 0.8% y/y from 0.2% previously.

Petrol prices in the UAE will be higher in April as the latest prices were announced yesterday, up around 4.0% compared to March prices. This marks the third month in a row that petrol prices have headed higher, reflecting the trend in global oil markets where Brent crude prices closed Q1 up 11.0% q/q. The latest hike leaves the cost of Super 98 up 4.7% y/y, and so could exert upwards pressure on the CPI inflation print for April given that transport accounts for 9.3% of the basket. In the latest print released, for February, transport inflation was at -3.1% y/y as Super 98 prices were down 5.6% y/y that month.

China’s official PMI surveys surprised to the upside over the weekend as the manufacturing survey hit 50.8 in March, up from 49.1 the previous month and beating the predicted 50.1. This was the first positive 50.0-plus reading for the index since September, and with robust growth in new orders in March, the outlook for the coming months is brightening also. For non-manufacturing, the PMI index hit 53.0 in March, up from 51.4 in February and the strongest reading since June last year. A robust acceleration in construction drove the improvement, while services also picked up. This morning, the Caixin PMI survey for March also came in stronger at 51.1, up from 50.9 in February and just higher than the predicted 51.0. The services survey is due for release on Wednesday.

The IMF’s executive board has completed the first and second reviews of Egypt’s extended fund facility programme and has signed off on the enlargement of the support package to USD 8bn, from USD 3bn previously. The board-level endorsement means that Egypt can immediately draw on USD 820mn, which will further help ease residual FX shortages in the country, following on from the investment package from the UAE.

CPI inflation in France fell to 2.4% y/y in March on the flash print, down from 3.2% in February and lower than the predicted 2.8%. Prices were 0.3% higher than the previous month. Italy’s inflation also came in below expectations, and with Germany and the rest of the Eurozone set to release data this week, the trend is pointing towards the ECB having room to cut rates sooner than later.

Today’s Economic Data and Events

18:00 US ISM manufacturing survey, March. Forecast: 48.4

Fixed Income

• US and European markets and some others were closed on Friday. Until the PCE data released on Friday, major data releases were thin on the ground last week so there was little concrete direction in US treasury yields. The 10yr rose 1bps to 4.20%, while the 2yr yield rose 2bps to 4.62%, aided by comments from Christopher Waller.
• Robust data readings, sluggish disinflation, and pushback from Fed officials has seen yields on USTs rise over the first quarter of the year, with the 10yr ending March 32bps higher than at the close of Q4, while the 2yr yield is 37bps higher.
• India, Poland, and Chile are among the central banks setting their policy rates this week. The RBI is expected to maintain the repo rate at 6.5% when it meets on Friday.
• Ratings agency S&P upgraded Oman’s outlook on its long-term foreign currency debt to positive, while keeping the rating at BB+, one notch below investment grade. The adjustment was on the back of an expectation that the government balance sheet will continue to strengthen, and that the economic reform programme will continue to deleverage state-owned enterprises.

FX

• There was little movement in currency markets last week, and the dollar index ended the week up by less than 0.1% against its basket of peers. Nevertheless, this held the index around levels last seen in mid-February as bets on imminent rate cutting have eased, and the index was up 3.1% q/q.
• Much of the dollar’s gains this quarter have been won against the yen, which ended Q1 7.3% weaker against the greenback at 151.35.
• The other majors also ended the quarter down against the dollar, if not by such a margin. Sterling lost 0.85% to end Q1 at 1.2623, while EUR fell by a greater 2.3% to 1.0790 as the ECB looks set to begin cutting rates sooner than later.

Equities

• With little in the way of meaningful data releases in the week to Thursday, and markets in Europe and the US closed on Friday, there were no significant moves in equity markets last week. In the US, the NASDAQ ended the week down 0.1% w/w on Thursday, while the Dow Jones and the S&P 500 both closed up, at 0.1% and 0.2% respectively. Gains were stronger in Europe, where the DAX saw a 1.7% gain w/w. The FTSE 100 closed up 0.9% while the CAC added 0.3%..
• The first quarter has been a strong one for equity markets. In the US, the Dow Jones, the NASDAQ, and the S&P 500 have added 9.1%, 5.6% and 10.2% respectively. The FTSE 100 is a laggard in Europe as it has added only 2.8%, but the CAC is 8.8% higher and the DAX is up 10.4%.
• In Saudi Arabia, the Tadawul ended Thursday down 2.1% w/w, while locally the DFM and the ADC closed down 0.8% and 1.0% w/w respectively on Friday.

Commodities

• Gains on Thursday on the back of US data revisions topped off a positive week for oil prices, with Brent futures closing up 1.4% w/w to USD 87.0/b, and WTI adding 2.6% to USD 83.2/b.
• Over the first quarter the two benchmarks are up 11.0% and 15.9% respectively, with OPEC+ production curbs and risk premia offsetting residual concerns around demand growth.