February PMI data shows resilience in major economies

Preliminary PMI data for the US, UK and the Eurozone came in much better than expected in February, as services sectors moved back into expansion territory, offsetting some continued weakness in manufacturing. UK services PMI rose to 53.3 this month from 48.7 in January, the highest reading since June 2022 and raising the prospect that the UK economy may avoid a recession in Q1.

In the US, the services PMI rose from 46.8 in January to 50.5 in February bringing the composite PMI back into expansion territory also for the first time since June last year. The Eurozone's better-than-expected PMI data was complemented by a sharp improvement in investor sentiment, with the ZEW investor expectations index rising to the highest level in a year at 28.1. 

Yesterday’s economic data continues to show that major economies remain more resilient to higher interest rates than had been expected in Q4 2022. However, this means there is scope for further tightening by developed market central banks as inflation remains well above target. Minutes from the Fed’s last meeting will be released this evening and are likely to echo comments made by policy makers in recent weeks about rates needing to rise further and remain higher for longer.

The fly in the ointment of strong economic survey data was guidance from US retailers Home Depot and Walmart yesterday indicating they expect profits to decline this year as consumers are likely to be cautious with spending this year. US home sales also declined in January to 4.0mn, well below the forecast for a 2.0% rise.

Dubai’s airports saw passenger traffic of 66.1mn in 2022, up 127% y/y. Passenger traffic in Q4 2022 reached 19.7mn, just 10% below Q4 2019 levels.

Lebanon’s CPI inflation rate ticked up to 123.5% y/y in January, from 122.0% the previous month. Prices were up 8.4% m/m, compared with 6.7% in December, with food price inflation accelerating to 11.3%, from 7.6%. Lebanon’s persistent economic and financial crises have kept price growth in triple digits since mid-2020 and with the Lebanese pound still losing value both on the parallel market and on the official exchange rate since a 90% devaluation at the start of February, inflation is likely to remain elevated for some time.

Key Economic Events and Data

11:00 Germany CPI (Jan final) forecast 1.0% m/m and 8.7% y/y

13:00 Germany IFO Business Climate (Feb) forecast 91.2

23:00 FOMC meeting minutes.

Fixed Income

• Another set of good data from the US, this time the ISM prints for January, will add more impetus for the Fed to keep rates on a restrictive path and pushed US Treasuries lower overnight. Yields on the 2yr yield rose by about 11bps on the close to settle at 4.7226% while 10yr yields added 14bps to 3.9525%. Minutes from the February FOMC will be released later today with markets expecting that they would have taken a hawkish tilt.
• European bonds also sold off overnight as better than expected PMI prints for Eurozone economies also increase rate hike expectations. Yields on 10yr bunds added 7bps to 2.525% while French 10yrs added 8bps to move above 3%. Gilts also dropped sharply with yields added 14bps to 3.609%.
• Egypt priced a USD 1.5bn 3yr sukuk at a yield of 11%. Egypt is rated ‘B/Stable’ by S&P.   

FX

• The rise in UST yields helped to push the dollar up against most peers overnight even as data in most major economies is still supporting a hawkish stance from central banks. EURUSD dropped by 0.4% overnight to 1.0648 while USDJPY added 0.6%, settling at 135.01. a considerable improvement in the UK’s PMI for February helped lift sterling with GBPUSD up 0.6% to 1.2112.
• Commodity currencies settled weaker with USDCAD rising by 0.6% to 1.3538, AUDUSD falling by 0.8% to 0.6853 and NZDUSD down 0.5% at 0.6222.

Equities

• Risk-off sentiment was prevalent in equity markets on Tuesday, starting in Asia where the Nikkei lost 0.2% and the Hang Seng closed 1.7% lower. An outlier was the Shanghai Composite, where mainland China stocks continue to benefit from expectations around stimulus. Indian indices closed broadly flat.
• The selling continued in Europe where the composite STOXX 600 ended the day down 0.2%, with the CAC dropping 0.5% and the DAX and the FTSE 100 0.5%. Selling was even sharper in the US, where the S&P ended the day down 2.0%, the biggest daily loss in two months, as more hot data from the US raised the chances of higher for longer rates. The Dow Jones lost 2.1% and the NASDAQ 2.5%.
• Locally, the DFM closed down 0.1% and the ADX 0.3%.

Commodities

• Oil prices tumbled again overnight, weakened by the rise in the dollar and in anticipation of what may be hawkish Fed minutes. Brent futures fell 1.2% to USD 83.05/b and WTI dropped by 0.2% to USD 76.16/b.