Saudi inflation picked up in July

• Saudi Arabia’s CPI rose 0.5% m/m in July, the biggest monthly increase since July 2020 when the VAT rate was raised from 5% to 15%.  The main driver was a 0.7% m/m rise in housing & utilities, which accounts for 20% of the index. Transport costs rose 1.1% m/m while services such as education, healthcare, hospitality and recreation & culture also saw relatively big prices rises in July. In contrast, food prices were up just 0.1% m/m last month, the smallest monthly increase this year. On an annual basis, headline inflation accelerated to 2.7% y/y from 2.3% in June. We expect inflation to average 3.0% in the kingdom this year.
• Bahrain reported a budget surplus of BHD 33mn (USD 88mn) in H1 2022, a sharp improvement from a deficit in H1 2021. Revenues were up 52% y/y while expenditure was up just 2% y/y. we expect a full year budget surplus of 3.7% of GDP this year, from a deficit of -6.7% in 2021.

• The US Empire manufacturing index for August for the New York region came in far weaker than had been anticipated at -31.3, in contrast to expectations of a positive print of 5.0. This was the second-biggest decline shown by the index in a series going back to 2001 and marked a severe deterioration in conditions as compared with the July reading of 11.1. New orders fell to -29.6 suggesting that the coming months will be challenging, even as business optimism improved modestly and returned to positive territory.

Today’s Key Economic Data and Events

• 13:30 Germany ZEW survey expectations, August. Forecast: -52.7
• 13:00 Germany ZEW current situation, August. Forecast: -49.0
• 16:30 Canada CPI inflation, % y/y, July. Forecast: 7.6%

Fixed Income

• US 10y yields closed down -4bp at 2.79% and are slightly lower again this morning as weak data in both China and the US stoked recession fears. 2y yields fell by -6bp and the curve steepened slightly. Foreign investment into US treasuries has surged to a record USD 356bn in H1 2022, according to data from Bloomberg.
• Yields of Australian and Kiwi bonds have also declined given those economies’ close trading ties with China, and the concerns about the Chinese economy following weaker than expected economic data in July, and a rate cut by the PBOC yesterday.  New Zealand’s yield curve has moved back into inverted territory in this morning’s session.
• Fitch raised Oman’s long term foreign currency debt rating by one notch to BB, reflecting “significant improvement in Oman’s fiscal metrics” as well as progress with fiscal reform.  Higher oil revenues will see Oman post a budget surplus this year. Fitch now rates Oman one notch higher than S&P and Moody’s, but the sovereign is still two notches below investment grade.

FX

• The USD index gained almost 1% yesterday. EUR lost -0.5% against the greenback while sterling was down -0.4%.  CAD outperformed both AUD and NZD, gaining 0.9% against the US dollar in yesterday’s session.

Equities

• The weak Chinese data yesterday weighed on some Asian equity indices yesterday as the Hang Seng dropped -0.7% on the first trading day of the week while the Shanghai Composite also closed down marginally.
• There was little firm movement in either direction in Europe through the start of the session before picking up moderately later in the day. The FTSE 100 added just 0.1% but the DAX gained 0.2% and the CAC 0.3%. In the US there were further gains as the S&P 500 (0.4%), the Dow Jones (0.5%) and the NASDAQ (0.6%) all closed higher.
• Locally, the DFM closed up 0.1% while the ADX dropped -0.5%. In Saudi Arabia the Tadawul gained 0.2% while Egypt’s EGX 30 fell -0.7%.

Commodities

• The prospect of a new deal between the US and Iran and a subsequent return of significant volumes of Iranian crude has moved forward as Iran sent the EU its official response to the bloc’s proposal. Iranian officials have signalled that they are ready for final discussions in Vienna if their ‘latest points are met’, although the US has countered that any extraneous demands must be abandoned before the 2015 accord can be revived.

• Weak Chinese data and the prospect of Iranian crude returning to global markets weighed heavily on commodity markets yesterday as concerns rose about the strength of the economy recovery and the potential slowdown in demand growth being compounded by a sharp increase in available barrels. Brent futures dipped 3.1% to USD 95.1/b while WTI fell -2.9% to USD 89.4/b, with both benchmarks trading down once more this morning.

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