Producer prices drop in the US

US producer price inflation fell by 0.2% m/m in May, its largest monthly decline since October last year. On an annual basis PPI inflation rose by 2.2%. Most of the decline, almost two-thirds, was down to lower gasoline prices along with other energy costs but goods prices were also lower. Services prices were reportedly unchanged. The cooler PPI report follows a positive signal from the CPI release earlier in the week that the disinflation trend in the US remains intact and will allow the Fed to eventually cut rates later this year.

Initial jobless claims were larger than expected in the week up to June 8, rising to 242k from less than 230k a week earlier. Since the start of the year, there has been a jagged but steady rise in claims as the US labour market cools overall. Continuing claims also increased, rising to 1.82m for the week up to June 1 compared with 1.79m a week earlier.

The Central Bank of the UAE estimated the UAE’s economy expanded by 3.6% in 2023, in line with our own estimates, and that it will expand by 3.9% this year, slightly faster than our projections. The central bank is forecasting non-oil GDP growth of 5.4% in 2024 along with a modest increase in oil production this year. For 2025, the central bank is projecting much stronger growth of 6.2% in headline GDP as it expects a strong rebound in oil production (8.4% higher) alond with another year of strong non-oil GDP. The central bank also estimated that inflation slowed to 1.6% last year, down from almost 5% a year earlier. The price growth was concentrated in Dubai where inflation rose by 3.3% while Abu Dhabi reported no price growth.

Today’s Economic Data and Events

• 18:00 US U. of Michigan inflation expectations Jun: forecast 3%
• 18:00 US U. of Michigan sentiment: forecast 72

Fixed Income

• The cooler than expected PPI print helped to lift US Treasuries overnight with yields lower across the curve. The 2yr UST yield dropped by 5bps to 4.6969% while the 10yr fell by 7bps to 4.2442%. Markets seem to be adding back in their expectation that the Fed will be able to cut rates twice by the end of the year, with 1.9 cuts priced in before December.
• Bond markets had a more mixed, and quieter, day overall yesterday. French yields extended their rise, up almost 3bps to 3.163% while 10yr bund yields pulled back, falling by 6bps to 2.468%. UK yields were flat. Emerging market bonds caught a bid overnight with a broad Bloomberg USD-index rising by 0.3%.

FX

• The dollar reversed some of its earlier losses overnight with the DXY index up by 0.5%. Most of those gains came at the expense of the Euro with EURUSD down 0.7%. GBPUSD dropped by 0.3% while the Japanese yen was weaker by 0.2% as USDJPY edged up to 157.03.
• Commodity currencies were resolutely weaker with USDCAD up by 0.2% at 1.3743, AUDUSD falling by 0.4% to 0.6636 and NZDUSD down by 0.3% at 0.6168.

Equities

• Global equity markets had a generally negative day with the Dow Jones falling by 0.2% along with steep drops in the Euro Stoxx 50 (down nearly 2%) while the FTSE was off by 0.6%. In contrast, the S&P 500 managed to gain 0.2% and the NASDAQ was up by 0.3%.
• Asian markets have got off to a soft trade in early sessions today with the Hang Seng lower and the Nikkei trading near flat but with a downward bias.
• Local equity markets were modestly stronger overnight. The DFM closed near flat although with a slight upward bias while the ADX added 0.4%. In Saudi Arabia, the Tadawul slumped by 1.3%.

Commodities

• With most of the week’s major data catalysts out of the way, oil prices ticked slightly higher overnight with both Brent and WTI recording gains of about 0.2% to settle at USD 82.75/b and USD 78.62/b respectively. Both have fallen off in early trade today.
• The secretary general of OPEC called the IEA’s long-term forecast for oil demand “dangerous…and will only lead to energy volatility.”