09 June 2023
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Eurozone enters technical recession in Q1

By Edward Bell

Q1 Eurozone GDP was revised down to -0.1% q/q in the final estimate, from an initial reading of 0.1%. This means the Eurozone entered a technical recession in Q1. A weaker final reading had been expected, given the already announced downward revisions for Germany and Ireland. Higher interest rates appear to be taking a toll on household consumption, which fell 0.3% q/q, after declining 1% in Q4.

US initial jobless claims rose sharply in the week ending 3 June, increasing by 28K to reach 261K. The rise in initial claims exceeded expectations and took the series to its highest level since October 2021. While the week-to-week numbers can be volatile there was also an uptick in the 4-week moving average. In contrast continuing claims fell in the week ending 27 May, to 1.76m, but remains above pre-pandemic levels.

Chinese consumer price inflation, in-line with expectations, rose only marginally in May. Headline CPI rose 0.2% y/y, up from 0.1% in April. PPI fell sharply in May, and by more than had been anticipated, declining 4.6% y/y. The latest inflation figures will fuel further speculation that the Chinese post-Covid recovery is showing signs of faltering, with reports suggesting that the POBC may soon reduce the rate paid on one-year loans in an effort to boost the economy.

Today’s Economic Data and Events

  • No notable data releases

Fixed Income

  • A jump in initial jobless claims in the US helped to dampen hawkish anticipation for the FOMC and pushed US Treasuries higher overnight. Initial jobless claims rose to their highest level since 2021 though it is so far a one-off sign of weakness in the US labour market. Yields on the 2yr UST had almost a 10bps round trip from top to bottom, ending the day down 4bps at 4.5147%. The 10yr yield had a similar trajectory, falling about 10bps before ultimately closing the day down 8bps at 3.7179%. Markets are still not quite at 100% of a hike priced in over the next two FOMC meetings.
  • European bonds also rallied overnight even though news that the Eurozone fell in recession in Q1 seems like ancient history at this point. Yields on bunds fell 5bps to 2.398% while the 10yr gilt yield closed lower by 2bps at 4.226%.
  • Bond markets generally closed higher with corporates, high yield and emerging market USD bonds closing with an upward bias. Turkey 10yr USD bonds trended lower with yields up 21bps at 8.784%. Egypt 10yr USD bonds closed slightly weaker with yields up just 7bps at 15.345%.

FX

  • The US dollar fell against peers overnight as markets adjust their expectations for Fed moves in the coming week. EURUSD jumped 0.8% to 1.0782 as the US labour data flashed negative, even amid the regional economy falling into recession in Q1. GBPUSD added almost 1% to 1.256 while USDJPY dropped by 0.9% to 138.92, abetted by the surprising out-performance in the Japanese economy.
  • Commodity currencies also rallied though gains for the CAD were limited even after the Bank of Canada hiked rates earlier in the week. USDCAD fell 0.1% to 1.3357 while both AUD and NZD added almost 1% to 0.6716 and 0.6095 respectively.

Equities

  • Yen strength on the back of the upwards GDP revision weighed on Japanese equities yesterday, with the Nikkei losing 0.9% and the Topix closing 0.7% lower. Elsewhere, the Hang Seng added 0.9% while on the mainland the Shanghai Composite closed up 0.5%.
  • In the US, a jump in initial jobless claims boosted equity markets, especially tech stocks as the NASDAQ closed up 1.0%. The S&P 500 added 0.6% and the Dow Jones 0.5%
  • Locally, the DFM closed flat while the ADX lost 0.3% on the day. In Saudi Arabia the Tadawul gained 0.2%.

Commodities

  • Oil prices ended the day lower with Brent futures down 1.3% at USD 75.96/b and WTI falling to USD 71.29/b, down 1.7%. Persistent anxiety over a pending collapse in demand seems to be weighing on the market with eyes looking to developments in Chinese monetary policy or real estate support mechanisms more than oil production cuts from OPEC+.

Written By

Edward Bell Head of Market Economics

Daniel Richards Senior Economist

Jeanne Walters Senior Economist


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