Dubai, Saudi inflation slowed in July

Dubai consumer inflation slowed to 1.0% y/y in July from 2.1% in June, the lowest annual reading since November 2021. The drop was entirely due to the high annual base (inflation peaked at 7.1% y/y in July 2022 as fuel prices surged). In contrast, the transport component of the CPI was down -20% y/y last month, offsetting annual price growth in housing (6.1% y/y), food (3.2% y/y) and household durables (7.7% y/y). Dubai CPI rose 0.2% m/m in July, with housing costs up 0.5% m/m. We expect housing in the CPI to continue to rise in H2 2023. CPI has averaged 3.3% so far this year, broadly in line with our annual forecast of 3.5%.

Inflation in Saudi Arabia also slowed in July, to 2.3% y/y from 2.7% in June. On a monthly basis, higher housing, food and transport costs were offset by lower clothing and household durables prices. Education costs also fell m/m. Inflation averaged 2.8% y/y in the year to July, slightly lower than our 3.0% forecast.

Labour market data from the UK showed some signs of cooling in the three months to June with the unemployment rate picking up to 4.2% from 4.0% a month earlier. Employment dropped by 66k in the three months to June, the first decline since September last year while the number of vacancies also fell. An increase in the supply of workers will also provide some relief to tight labour markets though that has not transferred across to wage pressures yet: wage growth excluding bonuses hit a record high level of 7.8% y/y in the three months to June. Inflation data from the UK is due to be released later today with core CPI expected to show a small moderation to 6.8% y/y.

US retail sales rose by a faster than expected 0.7% m/m in July, with the June reading revised slightly higher as well. Excluding autos, retail sales jumped 1.0% m/m, well above forecasts of a 0.4% rise, and indicating still robust consumer spending, particularly on services such as dining out, despite the surge in borrowing costs over the last 18 months.    

Investor sentiment on Germany’s economic outlook improved in August with the ZEW expectations index rising to -12.3 from -14.7 a month earlier. Assessment of near term conditions remains soft, however, with the current conditions index dropping to -71.3 from -59.5 in July. Survey respondents seem to think that the ECB has come to the end of its rate hiking cycle, limiting further upside pressure on borrowing costs. The next ECB meeting is set for mid September with markets pricing in about a 60% chance of a 25bps hike.

Egypt has agreed a deal with an Abu Dhabi development fund to finance USD 500mn of wheat imports over five years.

Today’s Economic Data and Events

• 10:00 UK CPI July y/y: forecast 6.8%
• 13:00 EC GDP Q2 y/y: forecast 0.6%
• 17:15 US industrial production July m/m: forecast 0.3%

Fixed Income

• US Treasury yields faded an initial spike in reaction to the stronger than expect July retail sales. After rising to more than 5%, the 2yr UST yield closed the day lower by about 1bps to 4.9522%. The 10yr held on to more of its move, closing the day higher by 2bps at 4.211%.
• Bond markets across Europe closed lower overnight with 10yr bund yields up 4bps at 2.67% while gilt yields added 2bps to 4.582%. Local currency emerging market bonds weakened as well, with 10yr Turkish yields up 83bps to 20.97% while the similar maturity South African yields rose 7bps to 11.837%.

FX

• Sterling was the notable mover among major currencies overnight as the rise in wage growth to a record high seems to set the market up for further tightening from the Bank of England. GBPUSD added about 0.2% to 1.2705 overnight. EURUSD closed near unchanged at 1.0905 while USDJPY also settled without much movement at 145.57.
• Commodity currencies closed weaker with USDCAD up 0.3% at 1.3498 while AUDUSD fell 0.5% to 0.6455 and NZDUSD dropped 0.4% to 0.5952. The kiwi has returned some of those losses following a hawkish hold from the RBNZ at their rate decision earlier today.

Equities

• Equity markets closed lower across the major markets yesterday, with the Nasdaq composite down -1.7% on stronger US retail sales data and the risk that rates would stay higher for longer. Comments by Fed Governor Neil Kashkari were on the hawkish side, as he said inflation was “still too high”. US bank stocks declined after it was reported that Fitch may downgrade more US banks.
• In the UK, the FTSE100 close -1.83% lower yesterday after stronger than expected wage growth stoked fears that the Bank of England may need to do more to bring inflation back to target. European indices were largely unchanged.
• In the UAE, the FM closed down less than 1% while the ADX fell -1.8%. The Saudi Tadawul ASI rose 1.5%.
• The Hang Seng Index and Shanghai Composite both opened lower this morning.

Commodities

• Oil prices settled lower overnight with Brent futures down 1.5% at USD 84.89/b and WTI down 1.8% at USD 80.99/b. The API reported a draw in crude stocks of 6.2m bbl last week along with a drain in gasoline stockpiles. Data from the EIA will be released later today.