UK GDP falls by less than expected in May

UK GDP growth figures showed a 0.1% m/m contraction in May, better than the predicted 0.3% drop. Over the three months, GDP was flat on the previous period. Industrial production and construction performed fairly poorly in May, dropping 0.6% m/m and 0.2% m/m respectively as the coronation bank holiday weighed on output and industrial action in the transport, education, and health sectors, and the civil service all constrained activity. On the other hand, services recorded flat growth in May with some business reporting a positive effect from the coronation celebrations: arts and entertainment saw a 1.8% m/m gain in May. In other UK news, Prime Minister Rishi Sunak has signed off on a 5% and up pay award for many public sector workers.

Initial jobless claims in the US in the week to July 8 came in at 237,000 yesterday, below the predicted 250,000 and lower than 249,000 the previous week. In other US data, PPI inflation was up just 0.1% m/m and y/y. Both data points giving further fuel to the expectation that the Fed will end its hiking cycle after the July meeting, but there are still hawkish comments coming from Fed members. Christopher Waller said yesterday that he still expected two more hikes from the FOMC this year.

Eurozone industrial production expanded 0.2% m/m in May, down from 1.0% in April and just below consensus projections of 0.3%. On an annual basis, production was down 2.2%, however. With the bloc’s manufacturing PMI having fallen to just 44.2 in the latest reading for June, the likelihood is that upcoming industrial production prints will show greater weakness

Chinese exports fell 12.4% y/y in dollar terms in June, worse than the predicted 10.0% drop and wider than the 7.5% recorded in May. This marked the second consecutive month of y/y declines and is indicative of the challenges facing the major exporter in an environment of slowing global demand, with significant declines in exports to key trade partners from all over the world. The data raise further questions around the strength of the Chinese economy given that the flat inflation data for June released on Monday suggested that domestic demand is also weak.

Today’s Economic Data and Events

• 18:00 US university of Michigan sentiment index, July. Forecast: 65.5

Fixed Income

• Following Wednesday’s better-than-expected CPI data, June’s US producer price print provided further evidence of a slowdown in inflation, driving a continued rally in US Treasuries. Yields on the 2yr UST closed lower by almost 12bps at 4.63% while 10yr yields declined from 3.857% to 3.763%.
• UK Gilt yields also fell further on Thursday, with the 2yr yield falling 8bps to 5.121% and the 10yr yield declining 9bps to reach 4.414%.
• There were also further widespread declines in yields on benchmark European bonds, with the 2yr bund yield falling 7bps to 3.131% and the 10yr bund yield down by 9bp to 2.469%.

FX

• The broad DXY index fell once more on Thursday, declining 0.75% against peers.
• Strong gains were seen in Sterling, on the back of May GDP data showing a smaller than expected contraction in the UK economy. This left GBPUSD near levels last seen in March 2022, up 1.14%, to reach 1.3136. EURUSD also gained on the day, up 0.87% to 1.1226, while there were further losses for the dollar against JPY which fell by 0.32% to 138.05.
• Commodity currencies once again closed strongly. USDCAD fell for a third consecutive day, declining 0.58% to 1.311, while both the AUDUSD and NZDUSD were up by 1.5% to reach 0.6889 and 0.6393, respectively.

Equities

• The risk-on rally continued for another day as global equity indices pushed higher. The day started on the front foot as in Asia the Shanghai Composite gained 1.3%, the Nikkei 1.5%, and the Hang Seng 1.9%.
• In the US, the Dow Jones added 0.1%, the S&P 500 0.9% and the NASDAQ 1.6%. In Europe, the composite STOXX 600 closed 0.6% higher.
• Locally, the DFM added 0.4% and the ADX 0.1%.

Commodities

• Both benchmarks continued to climb yesterday on the back of the general risk-on rally seen this week after the softer US CPI print. Brent futures closed up 1.6% to USD 81/4/b while WTI added 1.5% to USD 76.9/b.
• The IEA has cut its oil demand forecast for this year by 220,000 b/d as it highlighted pressures from factors such as higher interest rates on the global economy and thereby demand, citing a ‘deepening manufacturing slump’. Nevertheless, its projections are still for a record 102.1mn b/d this year, a 2% gain on 2022. Next year it sees oil demand growing by 1.1mn b/d.
• OPEC also released its latest projections yesterday. This year it expects demand to grow by 2.4mn b/d (up 90,000 b/d from last month’s report) while next year it sees oil demand growing by 2.3mn b/d to 104.3mn b/d, double the growth forecast of the IEA.