Inflation in Egypt has continued to rise into 2017

Federal Reserve Chair Janet Yellen warned about raising rates too slowly, as economic growth in the US accelerates, inflation edges higher and the labour market remains robust.  Pointing out that “waiting too long to remove accommodation would be unwise, the Fed chair declined to say whether the next rate hike would fall in March or June, saying each meeting is “live”. Ms Yellen did caution that the new administration plans for tax cuts and infrastructure spending would lead to more rapid growth and looser fiscal policy. 

Germany’s GDP for Q4 2016 grew at a rate of 0.4% in the final quarter of 2016, slightly below consensus estimates of 0.5%. An increase in state spending, stronger construction activity and higher private consumption offset the drag from weaker foreign trade for the quarter. This brought the full year 2016 GDP growth rate to 1.9% the highest in 5 years.

UK inflation hits its highest level since June 2014, as CPI hit 1.8% against market consensus of 1.9% Higher fuels costs where a key driver up almost 88% on a year back, the highest such rise since June 2000, driven by a global rebound in oil prices and a weaker pound .

Inflation in Egypt has continued to rise at the start of 2017, with headline CPI hitting 28.2% y/y in January, compared to 23.3% in December and 10.1% in January 2016. In month-on-month terms, prices rose 4.1%. Core CPI meanwhile surged 5.0% m/m and 30.8% y/y. The introduction of new excise taxes in September and subsidy reforms in November have played some role in this inflationary spike, but the biggest factor has obviously been the devaluation of the EGP. Given the magnitude of the EGP’s devaluation last year, inflation is likely to remain at these levels for the majority of 2017, and only trend lower once the pass-through from the exchange rate fluctuation fades out of the base.

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Source: Emirates NBD Research, Bloomberg

Fixed Income

Benchmark bond market slipped yesterday on the back of Fed chair Janet Yellen's comments to congress. Ms Yellen appeared to set the stage for more rate moves than the market had been expecting, regardless of fiscal policy under the Trump administration. Yields on 10yr USTs ended the day just under 2.47% and have now broken through that level. Moves on the shorter-dated 2yr UST were a little more muted despite the market increasing expectations for a March rate move to 34% from 30% a day earlier.

The soft performance of USTs spread across the developed world markets with Asia Pacific debt as the only significant outlier. Regionally the BUAEUL index ticked marginally higher while spreads compressed for a second day running.

Majid al Futtaim has hired banks for an upcoming perpetual USD bond but as far as new issues go the market is still awaiting a Kuwait sovereign issue around the shoulder of Q1-Q2. The sovereign has planned a roadshow for London scheduled for early March.

Dana Gas, a high yield name, said that a consortium including the company was awarded USD 121m by an arbitration tribunal in its dispute with the Kurdish Regional Government. The tribunal also dismissed the counter claims of the Kurdish government.

FX

The dollar rose overnight following the comments from Janet Yellen that kept open the option of the Fed raising interest rates in March. Previously the markets had more or less discounted the possibility of a March hike, with the odds of one prior to yesterday falling to 14%. However, in the wake of Yellen’s remarks the markets now see a 34% chance of a March rate rise. The dollar rose across the board in the last 24 hours with the exception of against the CAD and the AUD which are benefiting from recovering risk appetite and strength in commodities.

Equities

Developed market equities closed higher as Janet Yellen exuded confidence in the US economy and said that waiting too long to raise rates could disrupt financial markets. The S&P 500 index and the Euro Stoxx 50 index added +0.4% and +0.1% respectively.

Asian equities are trading higher this morning tracking positive close to developed markets overnight. The Topix index was trading +1.1% at the time of this writing.

Regional equities had a mixed day of trading with stock specific news dominating flows. The DFM index added +0.4% while the Tadawul lost -0.4%.

Drake & Scull closed +6.9% higher after the company even as the company reported a net loss of AED 490mn for Q4 2016. The company’s announcement that it was considering proposing a rights issue of AED 500mn in equity to a strategic investor gained greater investor traction. DXB Entertainments rallied +2.8% after the company reported revenue of AED 75.9mn in its first quarter of operations.

Dana Gas gained +6.4% after a consortium including the company was awarded USD 121mn by an arbitration tribunal in its dispute with the Kurdish government.

Commodities

Oil prices managed to recover some ground yesterday, up 0.5% and 0.7% for WTI and Brent futures respectively, but not enough to recoup Monday's losses. Brent futures are down a little this morning at USD 55.66/b while WTI is holding below USD 53/b.

The market's shrug at OPEC's high level of compliance sets a worrying tone for future data prints: if OPEC members actually show some increase in output the downside appears more wide open. Private sector surveys of US inventories showed another large build in stocks—over 9.9m bbl. If confirmed by the EIA later this evening it would quash at least the market's sentiment that the surplus in crude was indeed narrowing. The Brent curve is a little flatter than it was yesterday while WTI's long-term contango (1-24 month) has actually widened. 

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