Saudi GDP contracts for a second quarter

Saudi Arabia’s GDP contracted for the second consecutive quarter in Q2 2023. Headline GDP declined -0.1% q/q following a -1.4% decline in Q1. This was entirely due to lower oil production however, with non-oil sector growth remaining strong. On an annual basis, Saudi GDP grew 1.1% y/y in Q2, down from 3.8% y/y in Q1, with hydrocarbons GDP declining -4.2% y/y last quarter. Non-oil sector activity was underpinned by the private sector, which grew 5.5% y/y in Q2, similar to the growth rate in Q1. Government services slowed to 2.7% y/y from 4.9% y/y in Q1. We expect a modest overall decline in headline GDP (-0.5%) this year, as Saudi Arabia has implemented significant voluntary oil production cuts since July.

The Eurozone economy expanded by 0.3% in Q2, improving from a 0.1% contraction in Q1 and better than market expectations of growth of 0.2%. Most of the gains came from France’s economy as markets like Germany stagnated and Italy actually shrank in Q2. Ireland’s economy also expanded rapidly in Q2, up by 3.3% though it represents a relatively small share of overall Eurozone GDP. Inflation in the Eurozone rose by 5.3% y/y in July according to flash estimates, slower than the 5.5% recorded a month earlier. Core CPI held flat at 5.5%, however, while energy prices fell by more than 6% y/y.

Retail fuel prices in the UAE will increase in August in line with the gain in oil prices recorded in July. Mid-grade petrol with increase to AED 3.02/litre from AED 2.89/litre in July, a 4.5% increase, while diesel prices will rise by almost 7% to AED 2.95/litre. On an annual basis, mid-grade petrol is down 23% y/y. We expect oil prices to remain on an upward trend over the remainder of the year which are likely to bring retail fuel costs higher.

ADNOC has brought forward its target date to hit net-zero emissions to 2045 from 2050. The focus covers Scope 1 and 2 emissions which relate to direct emissions from operations as well as the emissions of suppliers and services. The UAE as a country plans to hit net-zero emissions in 2050 and has accelerated its emissions reduction targets to 40% from a business as usual target by 2030.

Today’s Economic Data and Events

• 08:30 AU RBA Cash rate target: forecast 4.35%
• 09:00 IN S&P Global manufacturing PMI July
• 18:00 US Jolts job openings June: forecast 9.6m
• 18:00 US ISM manufacturing July: forecast 46.9

Fixed Income

• Treasuries pulled weaker at the end of the trading day, unwinding about 4bps of moves on the 2yr UST. Yields closed near unchanged on the 2yr at 4.8766% while the 10yr yield close at 3.9588%, unchanged. European bonds showed moderate positivity with yields marginally lower across major economies: bund yields dropped less than 1bps to 2.487%.
• Emerging market USD bonds had a positive day with a broad index rising by 0.2% overnight inline with gains in high yield bonds more generally. In local currency markets, Turkey 10yr government bonds dropped as yields rose 16bps to 17.89% while South African 10yrs also weakened as yield rose almost 2bps to 11.49%.

FX

• The dollar pulled stronger against most major peers overnight even as yields closed near unchanged. EURUSD fell by 0.2% to 1.0997 while GBPUSD dropped 0.1% to close the day at 1.2835. The Bank of England sets policy later this week with another 25bps hike expected. USDJPY pushed higher again, rising by 0.8% to 142.29.
• Commodity currencies were stronger overnight with USDCAD down 0.4% to 1.319 while AUDUSD rose 1% to 0.6717 ahead of today’s RBA decision and NZDUSD added 0.8% to 0.6209.

Equities

• Equity markets started the week on the front foot, with the Hang Seng adding 0.4% and the Shanghai Composite 0.5%. Japanese equities were the Asian outperformers yesterday as the Nikkei ended the day 1.3% higher.
• In Europe, the DAX ended the day down 0.1% but there were modest gains elsewhere as the FTSE 100 gained 0.1% and the CAC 0.3%.
• US markets also saw modest gains. The S&P 500 and the NASDAQ gained 0.2%, while the Dow Jones added 0.3%.
• Locally, the ADX closed 0.3% higher while the DFM added 0.6%. Saudi Arabia’s Tadawul closed down 0.8%.

Commodities

• Oil prices held on to their positive momentum overnight with Brent adding 0.7% to USD 85.56/b and WTI up by 1.5% to USD 81.80/b. Anticipation that China’s government will provide some more support to the economy will help to keep a bid under oil prices in the near-term.