UAE economy grows 8.4% in Q1 2022

• The UAE cabinet approved a new law to boost public private partnerships in the UAE, allowing the private sector to participate in federal investment projects. The cabinet also reviewed the UAE’s economic indicators, announcing that real GDP grew 8.4% y/y in Q1 2022, following 3.8% growth in the full year 2021.  Tourism revenues were at AED 19bn in the first half of the year, while the number of hotel guests were up 42% y/y to 12mn. Sheikh Mohammed also announced that that foreign trade in the first half of the year was over AED 1tn, compared to AED 840bn in 2019.
• Energy ministers from the European Union moved toward endorsing a price cap for natural gas in an attempt to limit the impact of energy price inflation on their domestic economies. Ministers also explored other options to ensure that energy supplies remain secure, including providing assistance for utility firms to cover margin requirements and also a more divisive proposal to enforce mandatory demand cuts. The proposals will likely need to be confirmed by EU heads of state who have several meetings over the next several weeks. However, in the interim the effects of high energy prices, and natural gas in particular, will drag on the EU economy.
• Federal Reserve Governor Christopher Waller said he supported “another significant increase” in policy rates when the FOMC meets later this month, laying the way for a third consecutive 75bps hike from the Fed. James Bullard, head of the St Louis Fed, also appeared to endorse another large hike. Markets are essentially fully pricing in a 75bps hike with this week’s August CPI print to be the vital data point to confirm it. Even if there is another moderation in the monthly CPI reading it is unlikely to make the Fed pause unless it goes negative for a sustained period, something that doesn’t appear likely in the near term.

Today’s Economic Data and Events

• 10:00 UK industrial production July y/y: forecast 1.9%
• 11:00 TU current account balance July: forecast USD -3.7bn
• 16:00 IN industrial production July y/y: forecast 4.2%
• 16:00 IN CPI August y/y: forecast 6.9%

Fixed Income

• US Treasuries ended the week lower after Fed officials came out on Friday in support of another large hike at this month’s meeting of the FOMC. While we now enter the blackout period ahead of the Fed’s rate decision, this week’s release of the August CPI will be the final variable to determine what the Fed does and barring a major shock on the downside it is likely to affirm the Fed hiking by 75bps for a third meeting in a row.
• Yields on the 2yr UST rose sharply in the US session at the end of last week but managed a gain of just 5bps on the week as a whole to close at 3.5565%. On the 10yr, yields closed up 12bps on the week to 3.3097%.
• European bonds showed much more action as the ECB hiked by 75bps at its September meeting to fight back strongly against inflation. The 2yr Schatz yield added almost 23bps over the week to settle at 1.31% while the 10yr yield gained 17bps to 1.694%. In the UK the front end of the curve managed to rally with a 7bps drop in 2yr gilts while the 10yr yield added about 18bps to 3.091%. This week’s Bank of England meeting has been postponed for a week to allow for mourning period following the death of Queen Elizabeth II.
• Emerging market bonds settled mixed at the end of last week with Turkey 10yr local currency yields down 11bps to 11.685%, South African yields dropping almost 7bps to 10.752% while Indian 10yr yields added more than 3bps to 7.114%.

FX

• A broad risk-on turn at the end of the week helped to stem the dollar’s recent surge with the greenback falling for the first time in four weeks. The ECB’s 75bps hike will help to narrow the policy rate differential with the Fed though US rates are likely to move substantially higher again later this month when the FOMC meets. EURUSD closed at 1.0042 at the end of the week, a 0.45% gain on the day and a 0.88% move higher for the week. GBPUSD also rallied strongly in the final day, up 0.74% to 1.1589. The Japanese yen, however, remains soft even amid some verbal intervention from government officials. USDJPY added 1.6% on the week to 142.47, despite a 1.1% drop on Friday alone
• Commodity currencies managed to gain over the week with USDCAD down by 0.78% to 1.3031 though the Bank of Canada’s 75bps hike in the week failed to move markets much. AUDUSD closed the week at 0.6841, a gain of 0.42% over the five days while NZDUSD was barely higher, up by less than 0.1% on the week to 0.6109.

Equities

• Equity markets enjoyed a bounce on Friday as risk-on sentiment returned, which pushed most major global indices to w/w gains. In the US, the NASAQ added 2.8% over the five days after a 2.2% gain on Friday. The Dow Jones closed up 1.6% w/w and the S&P 500 2.5%.
• In Europe, w/w gains were more muted but again there were some strong performances on Friday. The FTSE 100 gained 1.0% w/w, while the CAC added 0.7% and the DAX 0.3%.
• Locally, the ADX gained 0.4% w/w but the DFM closed down -1.0%.

Commodities

• The week on week moves in oil prices failed to capture the wide swings on a daily basis, with Brent futures dropping by just 0.19% to USD 92.84/b and WTI barely changing at USD 86.79/b. However, both contracts recorded losses of more than 5% tempered by gains of around 4% on individual days, a measure of how responsive the market is to worries about demand emanating out of China.
• The prospects for a resumption of the JCPOA, the Iran nuclear deal, appear to be growing ever more slim as EU officials have said they have “doubts” about Iran’s sincerity to meet the commitments of any new agreement. Iran could be in a position to help offset the pending shortfall in oil supplies once EU sanctions on Russia take effect but the lack of diplomatic movement means an additional risk to supply.
• EU energy ministers have discussed various proposals to get gas and power prices under control, including taking the heavy step of forcing demand curtailment. European natural gas futures ended last week down 4% even as Russia has said it will not re-start the Nord Stream gas pipeline unless sanctions are lifted.

Click here for charts and tables