18 August 2022
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FOMC minutes highlight risks of tightening

By Daniel Richards

  • FOMC minutes from the July meeting released last night showed that Fed officials remained committed to rate tightening in order to quash inflation, even as it came at the risk of hampering growth. The minutes did note that it could become appropriate to slow the pace of rate rises, however, and that the effects of those hikes already implemented have not yet become apparent. 
  • US retail sales were flat m/m in July, confounding expectations of a 0.1% increase. Meanwhile, June’s expansion was revised down from 1.0% to 0.8%. Lower petrol prices at the forecourt weighed on the measure in July, and there were encouraging signs in other avenues of spending: online sales in particular holding up well, supported by the Amazon Prime Day sales in the middle of the month.
  • UK CPI inflation came in higher than expected in July, rising to 10.1% y/y compared to expectations of 9.8%. This was up from 9.4% the previous month and marks the first time the measure has breached double digits since February 1982. Prices were 0.6% higher than in July, a moderate slowdown from the 0.8% recorded in June but still higher than the analyst consensus prediction of 0.4% m/m.
  • The Eurozone economy expanded 0.6% q/q in the second quarter, slightly less than the initial estimate of 0.7%. High inflation and potential energy shortages are set to make the next two quarters more challenging, however, as foreshadowed by the weak German ZEW report earlier this week.
  • In its latest Article IV report, the IMF commended the Saudi authorities for sticking to the 2022 budget despite the higher than expected oil revenues, but stressed the need to continue with fiscal reforms, including reconsidering the cap on local petrol prices and maintaining the VAT rate at 15%. The Fund noted that the government had made significant progress on structural reforms including labour market reform and highlighted a positive economic outlook, forecasting growth this year at 7.6%.
  • Dubai Airport has raised its 2022 passenger target to 62.4mn, from an earlier projection of 58.3mn. While this would still be down on pre-pandemic 2019’s 86.4mn, it nevertheless presents a strong recovery from the past two years. H1 throughput soared 162% to nearly 28mn, with 14.2mn passengers over the three months to June.
  • CBE governor Tarek Amer has resigned his post at the head of the central bank and is taking a position as a presidential advisor to Abdel Fattah al-Sisi. It is as yet unclear who will take Amer’s role at the CBE, which is due to announce its latest rate decision later today. On Tuesday, the bank released a report stating that the GCC had deposited USD 14.9bn at the CBE between them in Q1, with the UAE depositing USD 5.7bn, Saudi Arabia USD 5.3bn and Kuwait USD 4.0bn. External debt levels have risen to USD 157.8bn at the end of March, up from USD 134.8bn a year earlier.
  • Today’s Key Economic Data and Events

  • 15:00 Turkey one-week repo rate, %. Forecast: 14.00%
  • 16:30 US initial jobless claims, week to August 13. Forecast: 264,000
  • Egypt overnight deposit rate, %. Forecast: 11.75%
  • Fixed Income

  • A bond market inversion in the UK flashed warning signs after the CPI inflation rate came in higher than expected yesterday. Yields on the 2y rose above those on the 10y to the largest degree since 2008 in the wake of the print, adding more pressure on the BoE to take concerted action in tackling inflation. At the end of the day, the 2y added 25bps to 2.403% while the 10y added 16bps to 2.288%.
  • In the US, 2y yields added 3bps to 3.2848% while the 10y climbed 9bps to 2.8968%.
  • FX

  • The US dollar index strengthened modestly yesterday, adding 0.1% against its basket of peers to 106.612.
  • GBP initially rallied following the high inflation print on bets of more tightening from the BoE, before losing ground against the greenback once more through the day as concerns over the economic outlook returned to the fore. It closed down -0.4% at 1.2048.
  • EUR closed up 0.1% against the USD at 1.0180.
  • Equities

  • Equity markets started the day off positively in Asia yesterday as most major indices closed higher. The Shanghai Composite and the Hang Seng both added 0.5% while the Nikkei gained 1.2%. In India, the key indices closed 0.7% higher.
  • However, the optimism tailed off as markets in Europe opened, where countries are facing higher energy costs and persistent inflation. The FTSE 100, the CAC and the DAX dropped -0.3%, -1.0% and -2.0% respectively.
  • In the US, the Dow Jones dropped -0.5%, the S&P 500 -0.7% and the NASDAQ -1.3%.
  • Commodities

  • Oil prices picked up again yesterday as demand fears dissipated and the focus shifted to supply constraints. Brent futures added 1.4% to USD 93.65/b, while WTI gained 1.8% to close at USD 88.11/b.
  • OPEC secretary-general Haitham al-Ghais told Bloomberg that global oil markets remained at risk of a supply squeeze, which is more in keeping with our expectation of a tight second half than the recent falls in prices would suggest to us – although the wildcard remains what comes of renewed urgency in discussions between Iran and the West.

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Written By

Daniel Richards Senior Economist

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