European inflation data comes in hot

Inflation in France rose by more than expected in February, up by 6.2% y/y and slightly ahead of market estimates. Food and energy costs both rose by 14% y/y in February while services price growth was closer to 3%. Inflation also accelerated in Spain, adding more fuel to expectations that the European Central Bank will indeed commit to much higher interest rates than markets had been anticipating earlier this year. A 50bps hike at the ECB’s next meeting on March 16 is nearly full priced in with another 50bps seeming set for the May meeting as well.

Turkey’s economy expanded by 3.5% y/y in the final quarter of 2022, faster than the market had been expecting though slowing down from the near 4% growth recorded in Q3. For 2022 as a whole, Turkey’s economy expanded by 5.6%. Household spending rose strongly, up by 16% in Q4, while government expenditure was also stronger, rising by 9% y/y. Turkey’s central bank cut rates last week to help offset the negative economic impact of the devastating earthquake that hit the south-east of the country earlier in February.

India’s economy slowed more than expected in the final three months of 2022 with GDP rising by 4.4% y/y, down from 6.3% y/y recorded in Q3 and underperforming market expectations. For the full fiscal year 2023 ending March 31, India’s government still expects growth of about 7%

US consumer confidence dropped in February according to a survey from the Conference Board. The headline index fell to 102.9 from 106 a month earlier thanks to a slump in the expectations component. A measure of business conditions showed that those reporting “good” conditions fell while those reporting “normal” expanded to nearly two-thirds of survey respondents. Large purchase plans decreased across homes, automobiles and appliances though inflation expectations did also move lower.

PMI numbers out from China for February showed further expansion in the economy as it reopens from its Covid restrictions. The manufacturing PMI rose to 52.6 in February, up from 50.1 a month earlier while the non-manufacturing PMI rose to a strong 56.3, up from 54.4 and beating market expectations. Data from China is showing a recovery underway but not complete as some measures like industrial production or retail activity still remain sluggish. However, as there is growing confidence that the Covid-19 pandemic has been dealt with, that should help to support greater private consumption.

Saudi Arabia central bank’s net foreign assets declined by USD 2.5bn to USD 438bn in January.  Private sector credit growth has continued to slow, declining to 11.9% y/y last month from 12.6% in December and 13.5% in November 2022. Money supply growth has also slowed however, and remains below the level of private credit growth at 7.9% y/y in January.  Government and related entities deposit growth has remained robust, while business and individuals’ deposit growth has slowed over the last four months. Point of sale transaction values grew 10.9% y/y in January and overall consumer spending (including ATM withdrawals) slowed to 4.6% y/y from 5.1% y/y in December.

Petrol prices in the UAE will increase in March with mid-grade fuel rising to AED 2.97/litre, up slightly more than 1% from AED 2.93/litre in February. Higher grade petrol will also rise by about 1% while diesel prices are due to drop by 7% to AED 3.14/litre. The modest gain in retail petrol prices come even as headline oil futures fell both on average in February and month-end to month end.

Today’s Economic Data and Events

• 09:00 IN manufacturing PMI Feb
• 11:00 TU manufacturing PMI Feb
• 12:55 GE unemployment rate Feb: forecast 5.5%
• 17:00 GE CPI y/y Feb: forecast 8.5%
• 19:00 US ISM manufacturing Feb: forecast 48

Fixed Income

• US Treasuries had a choppy but relatively narrow trading day to close out February. Yields on the 2yr UST eventually settled higher, rising by almost 4bps to 4.8158% while 10yr UST yields closed basically flat at 3.92%, paring some earlier losses in the day. Yields on the 2yr rose more than 60bps last month as markets came around to the understanding that the Federal Reserve will indeed stick with rates going higher for longer.
• Bonds in Europe settled lower as another batch of fast inflation data affirmed the necessity of the ECB to keep hiking rates, and by large amounts, at upcoming meetings. Yields on 10yr bunds rose 7bps to 2.645% while French 10yr yields added the same amount to 3.114%. Gilt yields also pushed higher, up 2bps to 3.822%.
• S&P revised its outlook on Damac to positive and affirmed the ‘BB-‘ rating on the developer.

FX

• Currency markets showed some wide two-way movements as an early spark for the Euro, on the back of faster than expected inflation in Spain and France, fizzled out later in the day. EURUSD eventually settled the day lower by 0.3% at 1.0576 while GBPUSD paced those losses, falling by 0.4% to 1.2022. USDJPY closed the day near unchanged at 136.17.
• Commodity currencies closed the day mixed with USDCAD moving against the loonie, with the pair up 0.5% at 1.3647 and AUDUSD down 0.2% at 0.6729. NZDUSD was the standout, gaining 0.3% to 0.6185.

Equities

• The prospect of higher for longer rates is outweighing any optimism around a soft landing in equity markets at present, and there were losses in all the key US and European indices. In Europe, the Stoxx 600 dropped 0.3% as Eurozone inflation came in hot and raised the likelihood of stronger action by the ECB.
• In the US, the NASDAQ, the S&P 500, and the Dow Jones lost 0.1%, 0.3%, and 0.7% respectively.
• Locally, the ADX gained 0.1% and the DFM 0.6%. In Saudi Arabia, the Tadawul closed 1.1% higher.

Commodities

• Oil prices managed to end February with a modest rally with Brent futures up 1.8% to USD 83.89/b and WTI adding 1.8% to USD 77.05/b. However, both contracts were still down on the month both on average and on month-end to month-end.
• The API reported another build in US crude inventories, up by 6m bbl last week along with a modest stock build at the Cushing price point. Gasoline and distillate stockpiles both fell, however. Official data from the EIA will be released later.