13 May 2022
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UK economy shrinks in March

By Edward Bell

  • The UK’s economy shrank by 0.1% month/month in March, limiting Q1 GDP growth to 0.8% q/q. The downturn in March was thanks to a drop in consumer activity, down 1.8% m/m, with retail sales and car purchases down considerably. The UK is facing particularly acute cost-of-living pressures thanks to high energy costs and lower social benefits. For Q1 as a whole growth was largely concentrated at the start of the year, implying the economy is losing momentum just as the Bank of England is contending with raising rates even more to deal with inflation it expects will peak at 10% in Q4 this year. Growth in the economy in Q1 was also flattered by a large build in inventories as business investment and government spending both fell while net trade activity was a head wind to growth.
  • CPI inflation in India came in faster than expected in April, rising by 7.79% y/y compared with market expectations of 7.42% and the prior month’s increase of 6.95%. High international energy prices as well as agricultural commodity costs are contributing to elevated price pressures in India with fuel prices up 11% last month. The RBI hiked rates outside of a normal scheduled MPC meeting at the start of May to help push back against inflation that is above the RBI’s target range and it may need to hike further to address the sustained price growth.
  • Initial jobless claims in the US rose marginally in the week ending May 7 to 203k, from 202k a week earlier. Continuing claims dropped by 44k to 1.343m as the US labour market continues to show considerable strength in the face of rising rates and costs.
  • The UAE will introduce an unemployment insurance scheme available to nationals and residents from January 2023. Employees who are made redundant will be able to receive up to 60% of their salary, capped at AED 20,000/month, for a period to compensate for living costs during a period of employment transition.
  • Inflation in Kuwait slowed modestly in March to 4.36% y/y from 4.37% a month earlier. Inflation in Kuwait is running at series high levels, reflecting a global trend toward higher prices. Inflation numbers for the UAE haven’t yet been published for any months in 2022 but ended last year at 2.5%, their highest level since 2018.

Today’s Economic Data and Events

  • 11:00 TU Industrial production March y/y
  • 13:00 EC Industrial production March y/y: forecast -1%
  • 18:00 US University of Michigan sentiment index May: forecast 64

Fixed Income

  • US Treasuries rallied overnight as risk sentiment continues to crumble as many cryptocurrency markets implode and equities linger. Yields on the 2yr UST fell 8bps overnight, moving steadily lower throughout the day to close at 2.5592%. On the 10yr, yields settled at 2.8479%, a drop of 7bps though the move was much more choppy.
  • Federal Reserve chair Jerome Powell again gave a signal that the Fed would raise rates by 50bps at the next two FOMC meetings and told a radio programme that the Fed wasn’t “actively considering” a 75bps hike to push back against inflationary pressures. However he did say the Fed would be flexible in response to data, saying they could do more or less depending on how the economy is performing.
  • The ADX has listed a USD 700m green bond from Sweihan on the exchange, the first green fixed income instrument to be listed.


  • Currency markets collapsed under evaporating risk sentiment with the dollar remaining the safe haven bid. A general aversion to risk is catching up all currencies bar the dollar as the Fed’s policy differential and its perceived haven status are helping to insulate from the volatility in markets. EURUSD fell 1.3% overnight to 1.038 with the very real risk of parity looking more and more in play. GBPUSD pared some of its deepest decline but still settled down by 0.4% at 1.2202. USDJPY managed to buck the trend to a degree, falling by 1.2% in favour of the Japanese currency to 128.34.
  • Commodity currencies weren’t spared the sell off. USDCAD moved up 0.4% to 1.3046 while both AUD and NZD dropped by more than 1% to 0.6856 and 0.6232 respectively.


  • The selling pressure on global equity markets eased towards the end of the day yesterday, following the rout seen over the previous week or more. The NASDAQ even managed to post a 0.1% gain, but the speculative tech heavy index remains down -27.3% ytd. The S&P 500 (-0.1%) and the Dow Jones (-0.3%) both closed down once again, but by a less pronounced degree than had become the norm in recent sessions.
  • There had been larger losses in Europe earlier in the day. The FTSE 100 dropped -1.6% as the GDP data released yesterday painted a dispiriting picture. The DAX lost -0.6% and the CAC -1.0%.
  • Locally, the DFM dropped -5.7% and the ADX -5.8%.


  • Oil prices pulled higher over the course of the trading session, recovering some losses from early in the day. Brent futures closed roughly flat at USD 107.45/b while WTI added 0.4% at USD 106.13/b. Both benchmarks are up more than 1.5% in early trade today.
  • The EU may push back its timeline for a ban on Russian oil imports out of fear for the economic damage it would cause to many member states’ energy security.
  • The IEA lowered its oil demand growth expectations for 2022 by a further 70k b/d to 1.8m b/d as lockdowns in China weigh on the growth outlook. According to the agency the peak in oil demand growth has already occurred (in Q1) and the remainder of the year will see a slower pace of oil consumption. On supply, the IEA is projecting an increase of 5.2m b/d, net of Russian output, led by a recovery in US production, though few signs are yet emerging of that. The IEA expects that Russian oil production could fall to as low as 9.6m b/d this year, its lowest level since 2004.

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Written By

Edward Bell Head of Market Economics

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