Inflation slows in Dubai at start of the year

Dubai’s CPI fell -0.6% m/m in January, bringing the annual inflation rate down to 4.6% y/y from 5.2% in December. The main drop in last month’s CPI was for transport costs, which declined -8.7% m/m, with the annual inflation in this component slowing to 4.6% from a 2022 high of 38% last summer. Housing & utilities costs, which account for over 40% of the index, rose 0.4% m/m and 4.4% y/y. Food price inflation accelerated at the start of the year, up 1.4% m/m and 5.5% y/y, and the cost of furnishing, household equipment and maintenance jumped 6.2% m/m and 9.5% y/y. It is unclear what is behind this, but it may be partly due to changes in customs duty thresholds. Recreation and culture prices also eased in January from December but on an annual basis are still up over 20% y/y. There was some relief on the services side however, with recreation and culture costs declining -6.4% m/m in January and restaurant and hotel prices down -1.5% m/m. We expect inflation in Dubai to average 3.5% this year, down from 4.7% in 2022.   

A measure of core business investment beat expectations in January in another sign of the resilience of the US economy to much tighter monetary policy. Capital goods orders ex-aircraft and defence equipment rose by 0.8% m/m in January, better than market expectations and an improvement from the drop of 0.1% recorded a month earlier. Headline durable goods orders fell by 4.5% m/m, slightly larger than market expectations as there was a large drop in non-defence aircraft. Shipments of core capital goods also rose, up by 1.1% m/m, sending a strong signal that firms are still choosing to invest amid high prices and high borrowing costs.

The UK and European Union reached an agreement on trading conditions for Northern Ireland. The deal will ease the movement of goods between Northern Ireland and the rest of the UK via separating goods bound for Northern Ireland from those to be sent to Ireland (a green lane/red lane system) as well as greater influence of local political leaders on EU rules while also maintaining European Court of Justice jurisdiction in trade disputes. The deal needs approval from legislatures in the UK to be fully resolved.

Industrial production in Japan fell sharply in January, down 4.6% m/m largely as a result of lower output of vehicles and chip manufacturing machines. At the same time, though, retail sales came in stronger than expected, rising by 1.9% m/m. The mixed data will be a challenge for incoming Bank of Japan governor Kazuo Ueda and likely warrants keeping policy unchanged at least initially.

Today’s Economic Data and Events

• 11:00 TU GDP y/y Q4 2022: forecast 2.9%
• 11:45 FR CPI y/y Feb: forecast 6.1%
• 16:00 IN GDP y/y Q4 2022: forecast 4.7%
• 19:00 US Conf. Board consumer confidence Feb: forecast 108.5

Fixed Income

• US Treasuries rallied to start the week, seeming to respond more the drop in the headline durable goods number for January rather than core measures which point to a still robust economy in the US. Yields on the 2yr UST fell 3bps to 4.7783% while the 10yr yield settled 3bps lower at 3.9141%.
• European bond markets closed weaker with bund yields up 4bps at 2.575% while 10yr French bond yields rose by 4bps to 3.046%. Gilt yields also edged higher, up 4bps to 3.8% as the new Brexit deal on the status of Northern Ireland failed to spark much relief.

FX

• Sterling rallied overnight, apparently showing some positivity around the improvement in relations between the EU and UK after a new deal on Northern Ireland was agreed. GBPUSD added 1% to close at 1.2064 while EURUSD added 0.6% to 1.0609. USDJPY also moved in favour of the yen, down 0.2% at 136.19.
• CAD led the commodity currencies higher with USDCAD dipping by 0.3% to 1.3575 while AUDUSD rose by 0.2% to 0.6739 and NZUSD closed near unchanged though with an upward bias.

Equities

• As equity markets opened on Monday, Asian indices were still weighed down by the risk-off sentiment which drove the US S&P 500 to its worst week this year on Friday. The Nikkei ended the day down 0.1%, while both the Hang Seng and the Shanghai Composite lost 0.3%. In India, the Sense also closed down 0.3%, while the Nifty dropped 0.4%.
• The day improved later in the session with European markets recouping some of the ground lost last week with robust gains across geographies and sectors. The composite STOXX 600 added 1.1% with the DAX gaining 0.7% and the DAX 1.1%.
• In the US, the Dow Jones, the S&P 500, and the NASDAQ added 0.2%, 0.3%, and 0.6% respectively. Locally, the DFM closed almost flat while the ADX dropped 0.3%.

Commodities

• Oil prices are on track for another monthly close lower as concerns that tighter interest rate policy in the US will prompt a slowdown in the economy outweigh the reopening of China’s market. Brent futures closed down overnight, falling by 0.8% to USD 82.45/b while WTI sank by about the same amount to USD 75.68/b.