Fed meeting gets underway as data weakens

• The Chicago and Dallas Fed activity indices both pointed to a slowdown in the US economy last month, particularly in the manufacturing sector, as the FOMC starts its two-day meeting today.  However, with Fed officials seemingly willing to sacrifice growth in order to curb inflation, and the labour market still very strong, we expect the Fed to raise its benchmark rate by 75bp. 
• Germany’s IFO business climate index came in below expectations in July, falling to 88.6 from 92.2 in June, providing further evidence that Europe’s largest economy is likely on the cusp of recession. The expectations component of the survey was particularly weak, declining to 80.3 from a revised 85.5 in June, as firms were increasingly concerned about energy prices and gas shortages. The decline in confidence was broad-based, affecting not only manufacturing but services, trade and construction as well.
• Gazprom’s announcement that it will halt another turbine in the Nord Stream pipeline for maintenance, reducing it’s flows to Europe to just 20% of capacity, will likely contribute to weak sentiment in next month’s surveys and add to inflationary pressures as well, with European gas prices jumping 12% yesterday on the news. The EU will hold a meeting on energy policy today, which may result in mandatory cuts to gas consumption as the bloc seeks to rebuild gas inventories ahead of the winter.
• Consumer prices in Dubai rose 1.2% m/m and 5.8% y/y in June.  Transport costs remain the main driver of inflation in the emirate, up 6.5% m/m and 33.3% y/y last month, mainly on higher petrol prices. This component is expected to rise further in July as petrol prices were increased again this month. Food prices rose 1.2% m/m and 8.9% y/y in June, while recreation and culture services prices have also increased sharply since March, up 35.8% y/y last month.  The housing component of the CPI finally turned positive on an annual basis last month, up 0.1% y/y, and we expect housing inflation to accelerate in H2 2022. Average CPI inflation in Dubai was 3.8% in H1 2022, and the full year average looks likely to be in the region of 5%. Last week, the central bank reported Q1 2022 inflation for the whole UAE at 3.4%, higher than Dubai’s Q1 2022 inflation of 2.6%.   
• Saudi Arabia’s crown prince announced yesterday that the kingdom will set aside SAR 300bn in an investment fund to finance Neom, with the amount potentially increased to SAR 400bn at a later date. This is seemingly in addition to an estimated SAR 600bn in funding from the PIF for the first phase of the project, which will run through the end of this decade. Another SAR 600bn will be raised from other regional SWFs, private investors and an IPO of Neom which could take place in 2024. The crown prince indicated that in order to achieve targeted economic growth rates, Saudi Arabia’s population would need to rise to 50-60mn by 2030 (from 34mn currently) and Neom would help to accommodate the influx of new residents.

Today’s Economic Data and Events

• 18:00 US Richmond Fed manufacuting index July: forecast -14
• 18:00 US Conference Board Consumer Confidence July: forecast 97
• 18:00 US New home sales June m/m: forecast -5.4%

Fixed Income

• US Treasuries drifted lower overnight as the market awaits the outcome of the FOMC later this week. Yields on the 2yr UST edged higher by almost 5bps to 3.0161% while the 10yr yield rose by about the same amount, closing at 2.7959%.
• European bond markets closed with a positive bias with yields generally lower, although the moves were relatively contained. Yields on the 10yr bund fell 1bps to 1.012% while the 10yr gilt yield closed about flat at 1.932%.
• Emerging market bonds got a boost overnight with yields on 10yr South African bonds down 9bps to 10.898% while Turkish 10yr bond yields fell 9bps to 16.61%.

FX

• In the quiet ahead of the FOMC the dollar fell against most peer currencies. The broad DXY index closed lower by 0.2%, its third day in a row of losses. Weak numbers out of the IFO survey of German business conditions failed to dent EURUSD substantially and the single currency settled marginally higher at 1.022. GBPUSD saw a bigger move, up by 0.37% to 1.2043 while USDJPY moved up by 0.4% to 136.69.
• In commodity currencies performance was more mixed with USDCAD down by 0.5% to the favour of the loonie at 1.2846. AUDUSD also managed to climb, up 0.4% at 0.6955 while NZDUSD settled marginally lower at 0.6265.

Equities

• There was little concerted movement to start the week with markers waiting for more big earnings results and the outcome of the upcoming FOMC meeting, but what there was was broadly positive. In the US, the S&P 500 (0.1%) and the Dow Jones (0.3%) both closed higher, although the NASDAQ dropped -0.4%.
• In Europe, the DAX was the outlier as it lost -0.3% but most other major indices gained. The CAC added 0.3% and the FTSE 100 0.4%.
• There were losses locally as the DFM closed down -0.7% and the ADX and the Tadawul dropped -0.8%.

Commodities

• Oil prices recovered some poise overnight with Brent futures rising by 1.9% to USD 105.15/b, reversing some losses earlier in the session. WTI future jumped by 2% to USD 96.70/b.  

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