Fed leaves interest rates unchanged

The US Federal Reserve left interest rates unchanged at 0.0%-0.25% at its meeting yesterday. The central bank said the economy faces considerable risks over the medium term and strongly reiterated its commitment to using the entire spectrum of its tools for as long as necessary to provide support to the economy. In his comments following the meeting, the Fed Chairman Jerome Powell was quite forceful in indicating that interest rates are expected to remain at current levels for the foreseeable future as he said ‘we are not even thinking about thinking about raising rates’. The dot plot released with the statement showed that all but two members expect interest rates to remain at the current level through 2022.

The economic growth projections released along with the statement showed that members expect the unemployment rate to fall to 9.3% at the end of 2020 and further to 6.5% in 2021.  US GDP is expected to contract by 6.5% in 2020 before rebounding 5% in 2021. Inflation was forecast to remain below the central bank’s target through 2022. In a separate data release, the US CPI dropped to 0.1% y/y in May from 0.3% in April while core CPI (excluding Food and Energy prices) eased to 1.2% y/y from 1.4%.

The FOMC also said that it would increase its holdings of Treasuries and mortgage–backed securities (MBS) at least at the current pace to sustain smooth functioning. A separate statement mentioned that the pace of balance sheet increase would be maintained at about USD 80bn a month for treasuries and about USD 40bn for MBS.

The UAE central bank expects real GDP to contract -3.6% in 2020, with the non-oil sector contracting -4.1% this year.  We expect a contraction of -4.5% in the non-oil sector and a steeper -7.8% decline in hydrocarbon sector growth (vs the central bank’s -2.4% forecast) resulting in total GDP contracting -5.5% in 2020.  The central bank also published private sector employment data showing a 2.0% y/y growth in private sector jobs in Q1 2020 for the whole UAE, led by a 7.1%y/y rise in real estate service & business services employment. Construction sector jobs declined -3.2% y/y in Q1 2020.  However, the central bank noted that the figures could “mask severe underemployment for visa holders in sectors that have been adversely affected by the COVID-19”. PMI survey data show private sector jobs declining in March through May.   

Egypt’s CPI inflation rate fell to 4.7% y/y in May, a six-month low and down from 5.9% in April. On a m/m basis, inflation was flat at 0.0%, markedly slower than the 1.3% recorded the previous month. While this slowdown in price growth increases the likelihood that the CBE will cut its benchmark interest rates at its upcoming MPC meeting on June 25, for now we hold to our expectation of rates being held steady. The authorities will be keen to maintain real interest rates in order to attract international portfolio investors hunting for yield once more, while a modestly depreciating currency and residual risks over the coronavirus pandemic continue to pose potential upside risks to inflation.

Turkish unemployment fell to 13.2% in March, from 13.6% in February, while youth unemployment increased by 0.2 percentage points to 24.6%. Both of these measures likely rose markedly in April as the coronavirus pandemic and related shutdowns began to impinge on the Turkish economy. To this end, President Recep Tayyip Erdogan announced an ‘employment shield’ this week, an economic support package aimed at safeguarding jobs, especially for the youth.

FOMC projects interest rates to remain at current levels through 2022

Source: Bloomberg

Fixed Income

Treasuries consolidated its previous session gains following the US Federal Reserve meeting. The central bank said it will continue to buy USTs at the current pace of USD 80bn a month and hinted that interest rates could remain at current levels through 2022. Following the meeting, the Fed Chairman also said that the central bank continues to internally discuss and assess the various forward guidance tools including yield curve control.

The curve shifted lower with yields on the 2y UST and 10y UST ending the day at 0.16% (-4 bps) and 0.72% (-10 bps) respectively.

Within emerging markets, S&P affirmed India’s credit rating with stable outlook. The rating agency said it expects government’s fiscal condition to improve by next year and hoped that reforms initiated by the government will bear fruit in the long term.

Regional bonds extended its rally to seventh consecutive trading session. The YTW on Bloomberg Barclays GCC Credit and High Yield index dropped 3 bps to 3.18% and credit spreads widened marginally to 252 bps.

The primary market pipeline continues to build as Sharjah Islamic Bank hired banks for a USD-denominated sukuk.

FX

The dollar reached its lowest point since march on Wednesday. The DXY index dropped to lows of 95.977 before meeting support to trade at 96.010. USDJPY remains under heavy selling pressure since the start of the week. The currency pairing has slid beyond the 50-day moving average (107.66) to reach 106.95.

The euro is trading at its highest level since March amid the dollar's continued weakness and continues to hover in between 1.1300 - 1.1400. The currency reached highs of 1.1422 late last night but met resistance and now trades at 1.1390. Similar to the euro, Sterling also reached its highest point since March, at one point hitting highs of 1.2813 but has since declined to trade at 1.2730. The AUD and NZD have both reversed the majority of the gains they recorded yesterday in the early hours of this morning, with both currencies being largely unchanged from Tuesday's closing price. 

Equities

Developed market equities closed lower as the Federal Reserve assessed that the economic recovery may take longer than what the market is pricing in at the moment. The Euro Stoxx 600 index and the S&P 500 index dropped -0.4% and -0.5% respectively.

Regional markets closed largely lower as the enthusiasm witnessed at the start of the week was absent. The KWSEPM index dropped -1.8% and the Tadawul closed flat. The flows continue to remain concentrated around market heavyweights.

Commodities

Oil prices are off heavily this morning as the market responds to a grim outlook for the near-term health of the US economy from the Federal Reserve and another sizeable build in crude inventories. Brent futures are down by 2.4% at USD 40.73/b while WTI is off by 2.8%, trading at USD 38.48/b.

Crude stocks in the US rose by 5.7m bbl last week thanks to heavy deliveries into the Gulf region. Builds across much of the rest of the barrel helped push overall commercial petroleum stocks up by 9.7m bbl. Production was down by 100k b/d at 11.1m b/d while product supplied bounced strongly, up by 2.5m b/d to 17.5m b/d. However, that still compares with more than 20m b/d at the same time a year ago.

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