UK expected to bounce back by next year

• UK Finance minister Rishi Sunak said in his annual budget speech yesterday that he expects the economy to return to its pre-pandemic size in mid-2022, six months earlier than previously forecast, helped by the UK’s s vaccination programme. Britain's Office for Budgetary Responsibility (OBR) said the economy was likely to grow 4% in 2021, slower than the 5.5% it had forecast in November, due largely to the current lockdown which began in January, However it raised its forecast for growth in 2022 to 7.3% from 6.6%. Sunak will undertake Britain's first rise in corporation tax since 1974 that will see large, profitable companies paying 25% from 2023 compared to 19% now. However, he will offer firms an immediate two-year "super-deduction" tax break in a bid to boost short-term growth. Other support measures include a five-month extension of Britain's jobs rescue plan, wider help for the self-employed and the continuation of an emergency increase in welfare payments. A business rates exemption for retail, hospitality and leisure businesses will now run until the end of June. While an existing tax break for home-buyers was also extended by three months until end of June and for cheaper homes until the end of September. Sunak said overall borrowing will be much bigger next financial year than expected just a few months ago at GBP 234 bn, or 10.3% of gross domestic product, compared with a previous estimate of GBP 164 billion, or 7.4% of GDP

• US private payrolls increased less than expected in February, rising by 117,000 jobs last month after increasing 195,000 in January according to data released by the ADP National Employment Report. The report showed job losses in manufacturing and construction, which fell by 3,000 and 14,000 respectively, hiring in the services sector increased by 131,000 jobs, with the leisure and hospitality industry adding 26,000 positions. The data was published ahead of the government's closely watched employment report on Friday, and could dampen expectations for an acceleration in job growth in February. It should be noted that the ADP's private payrolls report, has had a poor track record predicting the private payrolls count in the government's more comprehensive employment report.

• The Institute for Supply Management (ISM) said its non-manufacturing activity index fell to a reading of 55.3 last month from 58.7 in January, which was the highest since February 2019.  This comes as a drop in new Covid-19 cases and increased vaccinations allowed reduced restrictions on restaurants and other consumer-facing businesses, however brutal winter storms lashed Texas and parts of the populous South region in mid-February dampened activity.  The survey's measure of prices paid by services industries jumped to 71.8 last month, the highest reading since September 2008, from 64.2 in January, mirroring findings of the ISM's manufacturing survey published on Monday. The survey's measure of new orders for the services industry fell to a nine-month low of 51.9 in February against a reading of 61.8 in January. Backlog orders jumped to a 55.2 last month from 50.9 in January and export orders also rebounded sharply. The survey's index of services industry employment fell to 52.7 last month from a reading of 55.2 in January.

• Qatar’s PMI slipped to 53.2 in February from 53.9 in January on slower business activity and new orders growth.  Employment in Qatar’s private sector increased fractionally last month, but staff costs were slightly lower on average, likely reflecting lower salaries. Input costs declined for the second month in a row, but selling prices rose slightly in February.  Private sector firms were largely neutral about the outlook over the coming year.

• Lebanon’s headline PMI reading rose to 42.2 in February, up from 41.0 in January and the highest reading since December 2020. Employment rose to a neutral 50.0. The headline figure is also an improvement on the 41.0 averaged over last year, as the country was beset by challenges including an economic and financial collapse, the Covid-19 pandemic and the Beirut explosion in August. Nevertheless, the PMI index remains deeply in sub-50.0 contractionary territory, and the Lebanese economy remains under significant pressure. The collapse in the currency continues as the pound broke the LBP 10,000/USD barrier on the parallel market this week, prompting renewed protests across the country as there remains still no progress in government formation – an essential first step towards implementing the reforms Lebanon desperately needs.

• CPI inflation in Turkey surprised to the upside once again in February, coming in at 15.6% y/y compared to consensus projections of 15.4%, and growth of 15.0% in January. Given the central bank governor’s vocal stance that tight monetary policy will be maintained until there is a substantial easing in inflationary pressures, this has given rise to increased speculation that the MPC will opt for a hike to the one-week repo rate at its upcoming March 18 meeting. Following the data release the lira initially appreciated briefly despite the inflation miss, before depreciating against the dollar later in the session.

Today’s Economic Data and Events

• 13:30 GB Construction PMI (Feb) Forecast 51.5
• 17:30 US Initial Jobless Claims Forecast 775K    

Fixed Income

• Bond markets sold off sharply later in the session yesterday, pushed lower by a bounced upward in breakeven inflation expectations and rising real yields. Declines were consistent across nearly all major developed markets with US yields rising almost 2bps on the 2yr and almost 9bps at the close on the 10yr. German 10yr bund yields have pushed below -0.3%, a gain of 6bps overnight while gilt yields added more than 9bps to 0.778%.
• Bond market attention will turn to Jerome Powell today and whether he will address the rising bond yields. In previous commentary he has noted that they are a sign of confidence in the US recovery. Also helping push yields higher was an announcement from President Joe Biden that vaccines would be available for all American adults by May.
• Emerging market bonds displayed some resilience in the face of rising US yields although how they open today will be more telling. South African yields continue to push above 9% while Turkish 10yr yields are hovering close to 13%.
• APICORP priced a 5yr USD 250m issue at 1.26% while Sharjah is pricing a USD 12yr at around 3.875% and a 30yr at 4.875-5%.

FX

• It was another day of dollar strength as investors look to the potential for higher growth in the US relative to peer economies. The DXY index added 0.18% to settle at 90.947 with gains across the board. EURUSD was lower by 0.2% at 1.2063 while USDJPY pushed above the 107 handle for the first time since July. GBPUSD was relatively unchanged.
• Commodity currencies saw some of the heavier selling with AUD and NZD off by almost 0.6% each and USDCAD up 0.16% despite a gain in oil prices.

Equities

• US equities sold off once again yesterday following a surge in bond yields as the reflation worries remained in play ahead of Jerome Powell’s speech tonight. The NASDAQ was the major loser, ceding -2.7%, while the Dow Jones and the S&P 500 lost -0.4% and -1.3% respectively.
• Things were more positive in Europe where the DAX gained 0.3% and the DAX 0.4%. The European composite STOXX 600 gained 0.1% but the Italian FTSE MIB continued to lose ground, closing -0.2% lower. In the UK, the FTSE 100 closed up 0.9% following the chancellor’s budget announced yesterday.
• Within the region the DFM gained 0.8% and the Tadawul 0.7%.

Commodities

• Oil prices were higher overnight as the market is guessing what OPEC+ will announce at today’s ministerial meeting. Brent futures closed up 2.2% at USD 64.07/b while WTI was up by 2.6% at USD 61.28/b. OPEC+ has so far kept quiet on what they will decide at today’s meeting with the market setting up for a roughly 1.5m b/d increase, that would see Saudi Arabia unwound its additional cuts and a restoration of some of the rest of OPEC+ output.
• US crude inventories jumped by 21m bbl last week, the largest weekly gain on record. However, the enormous build was a result of refineries essentially freezing shut: refinery utilization dropped to just 56% as a result of freezing conditions in the past few weeks in the US. Crude output is already showing signs of recovery though, rising by 300k b/d to 10m b/d.

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