Inflation slows in Eurozone

Inflation in the Eurozone decelerated sharply in September to 4.3% y/y on its preliminary estimate, down from more than 5% a month earlier. Core inflation dropped to 4.5% from 5.3% in September thanks to declines in both the goods and services component while a surprisingly large drop in energy price inflation also helped to flatten the headline number. Inflation has cooled substantially in the Eurozone but still remains well above target levels and we believe will make the ECB hold rates steady well into 2024. At a national level, preliminary estimates of Germany’s CPI show it falling to 4.5% y/y from more than 6% a month earlier while French CPI held steady at 4.9% y/y.

In the US, the core PCE deflator rose just 0.1% m/m in August, its smallest increase since 2020 and firming up the disinflationary trend that looks to be embedding in the US economy. On an annual basis, the headline PCE deflator was up 3.5%, still above the Fed’s target of 2% and its strongest print in the last three months. However, the overall trend for inflation looks to be slower which will allow the Fed to keep rates unchanged and begin to ease part way through 2024. Real personal spending slowed m/m to 0.1% in August from 0.6% a month earlier. The third estimate for US GDP in Q2 was left unchanged at 2.1% q/q from the Bureau of Economic Analysis.

The UK economy expanded more than previously estimated in Q2, up by 0.2% q/q. The previous quarter’s growth rate was revised up to 0.3% from 0.1% previously, helping to push the UK economy above its pre-Covid pandemic levels. Weak performance in recent PMI readings may make the positive upgrades to past data a high benchmark to clear with market expectation for just 0.4% expansion in GDP this year.

Saudi Arabia is targeting 70m international tourist visitors per year by 2030 according to a statement from the country’s tourism minister, Ahmed al Khateeb. He expected that tourist arrivals in 2023 would total between 25-30m. Saudi Arabia is spending heavily to expand its hospitality and transport offerings, including major developments along the Red Sea coast as well as a new airline.

Saudi Arabia has revised its growth estimates for 2023 to 0.03% as production cuts impact headline GDP activity. The Minister of Finance estimates non-oil sector growth of 5.9% y/y with trade, hospitality and tourism helping to support growth. Our estimate for non-oil growth is for 5% this year. The government also now expects a fiscal deficit of SAR 82bn thanks to lower oil production. That compares with a prior estimate of a fiscal surplus of SAR 16bn. In terms of GDP, the fiscal balance is set to record a deficit of about 1.9% of GDP, wider than our estimate of a 0.7% deficit.

Retail fuel prices in the UAE will be moderately higher in October with mid-grade petrol at AED 3.33/litre, up 0.6% m/m. Diesel prices will be higher, rising by 5% m/m to AED 3.57/litre as benchmark diesel prices have been pushed higher by an acute shortage of the distillate fuel, particularly in European markets.

Official PMI estimates from China showed an improvement in September with the manufacturing PMI rising to 50.2 from 49.7 a month earlier and the first positive print for the measure since March this year. The non-manufacturing PMI which includes services and construction also improved, rising to 51.7 in September from 51.0 a month earlier. The improvement, albeit small, in the PMIs may provide more hope that China’s economy has bottomed out and the government can take measures to help support growth without worsening the debt burden of major developers.

Today’s Economic Data and Events

• 11:00 S&P Global/ICI Turkey manufacturing PMI Sept
• 18:00 US ISM manufacturing Sept: forecast 47.9

Fixed Income

• US Treasuries had a momentary pop higher on Friday in response to the slow core PCE print but faded the gains over the end of the trading session. Treasuries still managed to end the day higher, however, with yields on the 2yr UST down 1bps at 5.0436% and the 10yr marginally lower, closing at 4.5711%.
• There was some risk appetite at the end of the week with high-yield and EM USD-denominated bonds pulling higher. In local currency markets, South African 10yrs were an outperformer with yields down 23bps at 12.352% while Indian 10yr yields dropped 2bps to 6.94%. Turkey 10yr yields rose by 14bps to 25.91%.
• S&P upgraded its sovereign rating on Oman to ‘BB+’ with a stable outlook and affirmed their rating on Turkey at ‘B’ but changed the outlook to stable from negative.
• In central banks this week, both Australia and New Zealand set policy (no change expected in either) and the RBI sets policy on Friday, no change expected.

FX

• Currency markets had a mid-session pop higher against the US dollar on Friday but generally faded those moves and most closed near unchanged. EURUSD settled at 1.0573, up 0.1% while GPBUSD settled at 1.2199, marginally lower, and USDJPY was near unchanged at the close at 149.37. The broad theme of dollar strength looks to be holding true even as price pressures are slowing in the US.
• Commodity currencies showed more mixed performance. USDCAD added almost 0.7% with the loonie the worst performer of the day as the pair closed at 1.3577. AUDUSD added 0.1% to 0.6435 and NZDUSD added 0.6% to 0.5998.

Equities

• Despite moves on Friday being mixed, US stock markets marked their first negative quarter of 2023. The Dow Jones and the S&P both fell on the day, declining 0.47% and 0.27%, respectively. The NASDAQ, in contrast rose 0.14%.
• There were broad-based positive moves in European equities. The Eurostoxx 50 rose 0.31%, the CAC 40 increased 0.26% and the DAX improved by 0.41% on Friday. The FTSE 100 was buoyed by GDP revisions, increasing 0.08%.
• Locally, the DFM rose 0.52% and the ADX declined 0.25%.    

Commodities

• Oil prices edged back in the last few trading sessions with November Brent going off the board at USD 95.31/b, near flat on Friday. WTI settled at USD 90.79/b, down about 1%. Markets will increasingly look to 2024 and projections for oil market balances. Should a material non-OPEC+ supply response emerge then some of the current tightness in oil markets could dissipate though we wouldn’t rule out OPEC+ countries extending their cuts across 2024 at this time.