Fed in focus this week

The focus for the week ahead will be on the Federal Reserve which concludes its FOMC meeting on March 22. The Fed will need to decide whether it can indeed press ahead with tightening policy to carry on its fight against inflation while there is considerable strain in financial markets. We expect that they will hike by 25bps as inflation data has remained elevated. Fed policymakers will need to match the tone of the European Central Bank last week which hiked policy rates by 50bps but focused their narrative squarely on inflation and managed to avoid adding to the unease in markets.

The Federal Reserve has set up dollar swap agreements with the central banks in Canada, England, Japan, the Eurozone and Switzerland to help ease liquidity constraints during the current strain in financial markets. Swap agreements were last set up during the start of the Covid-19 pandemic to ensure that banks globally were able to access dollars during times of strain. The swap lines are due to run until at least the end of April.

Consumer sentiment in the US turned lower in March according to a survey from the University of Michigan. The index dropped to 63.4 from 67 a month earlier which likely reflected some of the anxiety over the stability of financial markets. The measure of current conditions dropped to 66.4 from 70.7 while the future expectations component fell to 61.5 from 64.7. The survey was reportedly completed ahead of the collapse of Silicon Valley Bank so would suggest that even ahead of the troubles in financial markets, consumers were growing less assured about the economic outlook. Inflation expectations were lower according to the survey with the five-year inflation expectation at 2.8%.

Industrial production in the US rose by 0.1% m/m for February after a strong 1.3% gain in January. Utilities production gained 0.5% m/m while mining output, which includes oil production, dropped by 0.6% m/m. the unease in markets along with steadily rising rates may mean that persistent gains in industrial output could be capped in short order even if an outright recession may be avoided.

The Ministry of Economy in the UAE announced a temporary increase in the price of eggs and poultry products as producers have been facing high production and input costs, particularly for feed and shipping. Prices would rise by a maximum of 13% which will contribute to upward pressure on food price inflation and will likely mean headline CPI persists at the relatively high levels seen in the last several months. Food accounts for roughly 12% of the Dubai CPI.

Today’s Economic Data and Events

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Fixed Income

• Treasury markets endured an enormously volatile week with the smallest day to day move in UST 2yr yields 26bps. From a week starting with considerable anxiety over the health of the US financial system to then moving to relief that monetary and financial authorities had tools in place to manage the fall out, bond markets are whipsawing substantially. Treasuries rallied on Friday with the 2yr UST yield down 32bps to 3.8374%, taking its weekly decline to 75bps. Yields on the 10yr yield closed 15bps lower to 3.4286%, bringing the weekly change to 27bps.
• Markets are pricing in essentially just one more 25bps hike from the Fed before rates are cut over the rest of 2023. December pricing is for about 100bps of cuts from the terminal rate of 5%.
• European bonds also caught a strong bid at the end of the week with 10yr bund yields down 18bps to 2.097% while gilt yields fell 14bps to 3.276%. The Bank of England will be in focus along with the Fed this week with expectations that it will signal an early end to its hiking cycle.
• S&P raised their sovereign rating on Saudi Arabia to ‘A’ with a stable outlook, citing the kingdom’s reform momentum. Moody’s revised their outlook on Saudi Arabia’s rating to positive from stable and affirmed the country’s ‘A1’ rating.
• Fitch affirmed their ‘B’ rating on Turkey with a negative outlook.

FX

• Currency markets swung between risk-on and off over the course of last week with the dollar ultimately bearing the cost. The broad DXY index dropped by 0.8% last week including a plunge of 0.7% on Friday alone. EURUSD whipsawed by wide moves on a daily basis, gaining 0.6% at the end of the week to 1.067 but ultimately closed the week near unchanged. JPY was the standout winner as markets flocked to haven assets: USDJPY fell by 1.4% on Friday to 131.85, bringing the pair down 2.4% for the week. GBPUSD also had a strong session, adding 0.5% on Friday to 1.2173 bringing its weekly gains to 1.2%.
• Commodity currencies also had a robust showing. AUDUSD added 1.8% over the week—up 0.6% on Friday—to close at 0.6697 while NZDUSD rallied a strong 1.2% at the end to 0.6269 and helping to bring weekly gains to more than 2%. USDCAD was lower by 0.7% to 1.3731 though the volatility in oil markets may open up more downside for CAD.

Equities

• Some major lobal equity markets took a leg lower last week as uncertainty in the banking sector weighed on banking stocks in particular. While there were some ups and downs over the five trading days, the overall outcome for most of the major global indices was to close significantly lower compared to the previous Friday. Notable outliers were the Hang Seng which closed up 1.2% w/w and on the mainland the Shanghai Composite added 1.5%, but elsewhere in East Asia the Nikkei dropped 3.1% w/w while the Kospi managed to close flat.
• In Europe, the composite STOXX 600 ended the week 3.9% lower. The FTSE 100 lost 5.3% over the week while the CAC dropped 4.1% and the DAX 4.3%.
• Things were somewhat more positive in the US where the unease around the SVB collapse receded. The S&P 500 added 1.4% over the week while the NASDAQ closed 4.4% higher w/w on Friday. The outlier was the Dow Jones which lost 0.2% w/w.
• There were gains in local markets on Friday but these were insufficient to see a higher weekly close as the DFM dropped 3.0% w/w and the ADX lost 4.2%.

Commodities

• Oil markets had an awful week with Brent futures down 11.9% to USD 72.97/b and WTI sinking by 13% to USD 66.74/b. Strain in financial markets took their toll on risk assets generally, with commodities showing more vulnerability to downside risks as industrial data from China hasn’t excited the market.
• Investors turned solidly away from oil futures last week with net length in Brent futures falling by 66k contracts last week.
• In contrast with oil prices, precious metals had a much stronger performance last week with gold prices up 3.6% on Friday alone to USD 1,989/troy oz, taking their weekly gain to 6.5%. Silver prices rallied even more, up 10% for the week as a whole.