Markets look ahead to the Fed

The Federal Reserve begins its two day FOMC meeting today. No change in the Fed’s policy stance is expected at this meeting, either for the Fed funds rate or for the pace of quantitative tightening. The more critical takeaway will be the Fed’s updated economic projections for the rest of 2024 and into next year, particularly on how they view the path of inflation and employment conditions. Inflation has cooled from peak levels in the US but has been hit a hard floor around the mid 3% level, still someway above the Fed’s target of 2%. Markets will also be focused on adjustments to the dots plot and whether Fed policy makers would now support fewer cuts than they did in March.

Turkey’s current account deficit widened to USD 5.28bn in April, up from USD 4.43bn a month earlier, but coming in smaller than market expectations. The goods deficit widened to USD 7.65bn in April as exports fell off while services credits increased to USD 7.5bn. On the capital account net portfolio investment turned positive to USD 2bn after a draw in March while net FDI inflows also turned positive to USD 856m.

Inflation in Egypt dropped to 28.1% y/y in May, down from 32.5% a month earlier according to government statistics. Foods prices fell by 3% m/m taking their annual inflation rate to 31% compared with 40.5% in April. The deceleration in inflation follows the devaluation of the Egyptian pound earlier this year and the pace of decline implies that goods had been priced at levels using unofficial exchange rates in 2023.

Industrial production in Saudi Arabia declined in April by 6.1% from the same period a year earlier. That represented a moderation from the drop of almost 9% recorded in March. Mining and quarrying—which includes oil production—was lower by 14.1% y/y, weighing on the overall index. Manufacturing by contrast improved to 7.7% growth from a contraction of 0.4% a month earlier. Utility output rose by 6.5% y/y, slower than the more than 7% recorded a month earlier. Elsewhere Saudi Arabia has published a more comprehensive breakdown of Q1 GDP data showing an overall drop of 1.75% y/y in Q1.

Today’s Economic Data and Events

• 10:00 UK unemployment rate Apr: forecast 4.3%

Fixed Income

• Treasury markets were relatively quiet at the start of the week as markets continued to digest the impact of the stronger than expected May jobs report for the US and looked ahead to inflation and the FOMC meeting later this week. The 2yr UST yield closed at 4.8804% while the 10yr yield added 3bps to 4.4670%.
• European bonds sold off more sharply in response to the outcome of the European parliamentary elections where parties that could threaten conventional economic policymaking gained ground. French bond yields jumped 13bps to 3.223% while bund and gilt yields also pushed higher.
• Bond markets overall closed softer at the start of the week with an index of emerging-market USD bonds down by slightly less than 0.1%.

FX

• The European election results weighed on EURUSD which extended its drop from Friday by an additional 0.3% at the start of the week. The pair closed at 1.0765 and could be prone for more downside if the Fed pushes a hawkish message later this week. USDJPY also moved in favour of the USD, with the pair up 0.2% at 157.04.
• Elsewhere major currency pairs gained against the dollar with GBPUSD adding almost 0.1% to 1.2731 while USDCAD dropped to 1.3759, AUDUSD added 0.4% to 0.661 while NZDUSD gained 0.4% to 0.6128.

Equities

• US equity markets started the week higher with the Dow Jones up 0.2% and outpaced by the S&P (up 0.3%) and the NASDAQ (up by 0.4%). European markets were negative, however, responding to some political uncertainty following the outcome of the European parliamentary elections. The Euro Stoxx 50 index fell 0.7% while the FTSE 100 was lower by 0.2%.
• Local markets had a mixed outcome overnight. The DFM slipped by 0.2% while the ADX added 0.6%. In Saudi Arabia the Tadawul closed near flat.

Commodities

• Oil prices had a positive start to the week as some of the selling pressure seemed to come out of the market. Brent futures added 2.5% to close at USD 81.63/b while WTI added almost 3% to settle at USD 77.74/b. OPEC will release its monthly oil market report today, likely with some context for the unwinding of the production cuts announced by the OPEC+ group earlier last week.