Dubai announces 10 year economic growth plan

Dubai has announced substantial plans to transform the emirate’s economy over the next decade. According to a tweet released by Sheikh Mohammed bin Rashid, ruler of Dubai and prime minister of the UAE, Dubai will increase foreign trade to AED 25.6trn over the next decade from AED 14.2trn over the last 10 years, and increase FDI to AED 60bn per year compared with AED 32bn over the last decade. Government spending and private sector investments are also due to increase substantially. The economic plan would see Dubai among the leading international financial centres, expanding on trade linkages with multiple economies.

Minutes from the December FOMC meeting showed that the Fed continued to prioritize fighting inflation and cautioned markets against “an unwarranted easing in financial conditions.” The minutes also showed the Fed is aware of the gap between market expectations for when rates will peak and turn lower and the Fed’s own expectations that it will need to take rates higher and hold them there for longer. The next FOMC meeting takes place at the cusp of January-February with markets expecting a 25bps hike.

The ISM manufacturing report for December fell to 48.4 from 49 a month earlier, affirming a slowdown in industry in the US economy. New orders dropped to a low 45.2 along with declines in both the import and export subindices. Somewhat positively for consumers and for the Fed’s fight against inflation, prices paid dropped to 39.4, not far off lows hit during the peak of the Covid-19 pandemic in 2020. While labour market data out later this week is still expected to show some resilience in the US economy, a slowdown, if not recession, does look as though it is on the cards imminently.

Inflation in France fell month/month in December, dropping by 0.1%, its first monthly drop since September. French inflation peaked at 6.2% in October 2022, considerably below peers like the UK and Germany. The December data print may give some solace to the ECB that while inflation in Germany is still running hot, if slowing, other eurozone economies are starting to see price growth moderate. The ECB next meets on February 2nd where a 50bps hike is expected.

Today’s Economic Data and Events

• 14:00 IT CPI y/y Dec: forecast 12.3%
• 17:15 US ADP employment change Dec: forecast 150k
• 17:30 US Initial jobless claims Dec 31: forecast 225k

Fixed Income

• Minutes from the December FOMC meeting sparked a reversal in US Treasuries overnight as markets may need to adjust to a still hawkish and committed Fed this year. The 2yr UST had been rallying for much of the day and then lost most of those gains on the release of the minutes. However, moves were overall fairly contained and yield on the 2yr UST ended the day at 4.3534%, down about 2bps. On the longer end, the 10yr showed less reaction and managed to hold on to most of its gains. Yields on the 10yr UST dropped 6bps to 3.6827%.
• European bond markets though were much stronger with bunds rallying. Yields on 10yr German bonds dropped 12bps to 2.264%, abetted by the relative softness in French inflation released overnight. While the ECB is still expected to hike at the February meeting, the emergence of a broad-based recession may cap how much higher rates can go.
• Bonds generally were bid overnight with a global high-yield index up 0.7% and emerging market USD-denominated bonds rallying. South African bonds extended their rally, with yields down about 6bps to 10.613%.

FX

• The dollar lost ground against peer currencies overnight although managed to steady itself later in the session on the release of the still-hawkish December FOMC minutes. EURUSD added 0.5% overnight to close the day at 1.0604 while GBPUSD bounced strongly, up 0.7% at 1.2055. USDJPY, however, moved against the yen for a second day running, with a substantial bump of 1.2% to 132.63.
• Commodity currencies gained solidly, helped by positivity China-Australia trade relations. AUDUSD added 1.7% to settle at 0.6839 while USDCAD dropped by 1.4% to 1.3478 and NZDUSD added 0.7% to 0.6294.

Equities

• Equity markets were positive yesterday with all three US benchmark indices closing higher. The Dow Jones, the S&P 500 and the NASDAQ added 0.4%, 0.7% and 0.8% respectively.
• This positivity has continued into Asian trading this morning where China’s reopening is bolstering equities despite the threat of rising Covid-19 case numbers. The Hang Seng is up 1.7% at the time of writing and the Shanghai Composite 0.9%.

Commodities

• Oil prices fell heavily for a second day running as near-term anxiety over the scale of Covid-19 infections in China is weighing against an otherwise bullish market outlook. Brent futures fell 5.2% to USD 77.84/b while WTI sank 5.3% to USD 72.84/b. Prices are down around USD 7-8/b since the start of the year.
• Market structures in oil markets remain weak: the 1-2 month spread in Brent futures is at a contango of around USD 0.20/b and is slightly wider for the same time spread in WTI.

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