UK economy narrowly avoids recession in Q4

UK GDP fell by -0.5% m/m in December, a larger fall than the -0.3% that had been expected. At least a portion of the December decline will be attributable to widespread industrial strike action over the month. The December figure left fourth quarter q/q growth flat, consistent with consensus expectations, meaning that the UK economy has avoided a technical recession by the narrowest of margins. The primary sources of growth in Q4 were real consumer spending, which rose 0.1% q/q and business investment which rose 4.8% q/q. There was also support from government spending and inventories. Offsetting that was a -3.2% q/q fall in residential investment and a drag from net trade. For 2022, as a whole, the UK economy recorded 4.1% y/y growth, down from 7.4% in 2021.

The headline figure for the University of Michigan Sentiment index rose to a value of 66.4 in February from 64.9 in January. While this value is the highest since January 2021, it is still at historically low levels. The improvement in the headline came from a rise in the current conditions sub-component from 68.4 to 72.6 in February, with the expectations component falling slightly. The long-run (5 to 10 year-ahead) inflations expectations series appears well anchored, remaining at 2.9% for the 3rd consecutive month.   

Indian industrial production rose 4.3% y/y in December, down from 7.1% y/y in November, and slightly below the 5% that had been expected. Strong y/y growth in mining and electricity was partially offset by slower growth in manufacturing.  

Today’s Economic Events and Data

• 16:00 India CPI Jan: Forecast 6.08% y/y

Fixed Income

• US Treasuries closed lower on Friday even as there was no fundamental catalyst to push markets one way or another. This week’s US CPI print for January will set the tone for markets and there is likely to be some more readjustment towards a higher Fed funds view as while inflation is slowing, it is still too high for the Fed to feel comfortable to ease up on policy.
• Yields on the 2yr UST rose about 4bps at the end of the week to close at 4.517%, its highest close since November last year. For the 10yr, yields rose 7bps on Friday, ending the week at 3.732%. The sell-off in benchmark bonds was matched in Europe where the prospect of tighter policy continues to weigh on the outlook. Bund yields added 7bps on Friday to settle at 2.36% while 10yr gilt yields added nearly 11bps to 3.393%.

FX

• The US dollar pulled higher against peers last week, prompted by a rise in UST yields and some risk-off moves. EURUSD closed Friday down 0.6% at 1.0678 taking its losses for the week to 1%. Market repricing of upside Fed risks seems to show more weight than a consistent message from ECB officials that tighter policy will be needed ahead. GBPUSD closed Friday down 0.5% at 1.2062, more or less unchanged on the week. USDJPY moved in favour of the yen on Friday with the recommendation for a new central bank governor suggesting a normalization of policy could be in the offing, eventually.
• Commodity currencies closed the week mixed against the dollar USDCAD moved in favour of the loonie, down 0.4% for the week as a whole with 0.8% drop on Friday to 1.3344 sparked by a pull higher in oil prices. AUDUSD closed the week with a slight weaker bias at 0.6917 while NZDUSD closed down 0.4% over the week at 0.6305.

Equities

• Asian markets were somewhat mixed last week. In Japan, the Nikkei ended the week up 0.6% after a choppy week, with a boost on Friday on the prospect of ongoing loose monetary policy from the BoJ offsetting some losses earlier in the week as the index tracked US equities, although there has been another pivot in the story now with a more hawkish bias now expected. By contrast, the Hang Seng ended down 2.0% w/w while the Shanghai Composite lost 0.4%. Indian indices were little changed over the week with the Sensex ending Friday down 0.2% while the Nifty added 0.1% over the week.
• European equity markets lost ground on Friday, eroding gains earlier in the week. In the UK, the FTSE 100 ended down 0.2% w/w, slipping from the record highs seen earlier previous days. The DAX lost 1.1% and the CAC ended down 1.4% w/w. In the US, there were modest gains for the S&P 500 and the Dow Jones on Friday but these were insufficient to offset losses earlier in the week and they closed down 0.2% and 1.1% w/w respectively. The NASDAQ fell further on Friday and ended the day down 2.4% w/w, with hawkish messaging from the Fed weighing on the interest rate sensitive index.
• Locally, the DFM ended the week up 2.4% while the ADX closed up 1.5% w/w. Within the region, in Egypt the EGX 30 added 8.4% w/w, boosted by a 3.9% gain on Thursday. The index has gained on the back of the depreciating currency and on mooted privatisations. In Saudi Arabia, the Tadawul ended Thursday down 2.7% w/w while in Turkey the Bist 100 was down 16.2% w/w after trading was suspended on Wednesday after circuit breakers were tripped by a 7.1% fall. The index will remain closed for five business days and will reopen this Wednesday.

Commodities

• Oil prices close higher last week as Russia announced plans to cut production by 500k b/d in March in retaliation for sanctions imposed on its oil and refined product exports. Brent settled up 8.1% last week to USD 86.39/b while WTI rose by 8.6% to USD 79.72/b. The rest of the OPEC+ producers’ alliance has reportedly indicated they will not change production plans to compensate for the decline in Russian output.