UK inflation accelerates to new 30 year high

• UK inflation hit 6.2% y/y last month, beating expectations of 6.0%. This was a new 30-year high and potentially makes the BOE’s job harder at its next several meetings following its dovish hike most recently.
• British finance minister Rishi Sunak cut fuel duty and some of a looming payroll tax increase on as he sought to alleviate a severe cost-of-living conditions against the backdrop of weakening economic growth. Fuel duty will be cut by 5 pence a litre for the next 12 months at a one-off cost of GBP 2.4bn, and the main rate of income tax will fall to 19% from 20% in 2024, reducing revenue by GBP 6bn a year. Sunak also launched a review of business taxation, with cuts planned at his next budget in the autumn. A sharp rise in social security contributions - originally designed to raise around GBP 12bn a year - remains scheduled for April, but in an attempt to reduce that hit, he said he would increase the threshold at which workers start to pay the contributions by GBP 2,700 from July, bringing it into line with the income tax system. The Office for Budget Responsibility said Sunak was undoing only one sixth of the tax rises he had previously announced.
• Sales of new US single-family homes unexpectedly fell in February, the second straight monthly decline, decreasing 2% to a seasonally adjusted annual rate of 772,000 units as reported by the Commerce Department. January's sales pace was revised down to 788,000 units from the previously reported 801,000 units. This comes amid rising mortgage rates and higher house prices that are squeezing out some first-time buyers from the market. New homes are a leading indicator for the housing market as they are counted at the signing of a contract. Sales surged 59.3% y/y in the Northeast and increased 6.3% y/y in the Midwest. But they fell 1.7% y/y in the densely populated South and tumbled 13.0% y/y in the West. There were 407,000 new homes on the market, the highest since August 2008 and up from 398,000 units in January. Houses under construction made up 65% of the inventory, with homes yet to be built accounting for about 26%. At February's sales pace it would take 6.3 months to clear the supply of houses on the market, from 6.1 months in January.
• Germany’s Ifo institute said yesterday growth will be weaker than expected this year due to the effects of Russia's invasion of Ukraine which will also push up inflation. It expects growth of only between 2.2% and 3.1% this year, from an earlier forecast 3.7%. The institute said the Russian attack is dampening the economy via significantly higher raw material prices, sanctions, increasing supply bottlenecks for raw materials and increased economic uncertainty. The Ifo revised its inflation forecast to between 5.1% and 6.1%, up from 3.3% which it had predicted in December. It raised its growth forecast for 2023 to between 3.3% and 3.9% from its December prediction of 2.9% and said it now sees inflation next year at around 2.0% compared with 1.8%.
• The UAE’s Ministry of Finance said yesterday on Twitter, that the President His Highness Sheikh Khalifa bin Zayed Al Nahyan on Wednesday issued federal law No.3 of 2022 for maintaining a balance in the 2022 federal general budget. This allows the use of foreign reserves and international debt instruments to maintain the balance in the budget and the use of a portion of the government cash reserves to tackle the financing gap.
• The IMF put out a statement regarding the recent developments in Egypt, where the central bank hiked rates ahead of its MPC meeting that had been scheduled for today, which was followed by a 15.9% depreciation of the currency that day after a protracted period of stability. According to the Fund, Egypt has requested renewed support ‘to implement their comprehensive economic program.’ The statement said that ‘Continued exchange rate flexibility will be essential to absorb external shocks’ and concluded that its staff were working closely with the Egyptian authorities to ‘prepare for program discussions’, suggesting that any new deal was not imminent.

Today’s key economic data releases and events

12:30 CH SNB Interest Rate Decision (Q1) Forecast -0.75%

12:30 EU German Manufacturing PMI (Mar) Forecast 56

13:30 GB Composite PMI Forecast 58.7

13:30 GB Manufacturing PMI Forecast 57

13:30 GB Services PMI Forecast 58

16:30 US Core Durable Goods Orders (MoM) (Feb) Forecast 0.60%

16:30 US Initial Jobless Claims Forecast 211K                            

Fixed Income

• Benchmark government bonds closed higher yesterday after several days of steep losses. A general move away from risk assets helped to bring bonds upward and push yields lower. On the 10yr UST, yields fell 9bps to 2.2917% while the 2yr UST yield dropped almost 7bps to 2.0961%. The 2s10s spread continues to narrow, however, falling to less than 19bps overnight.
• In European markets bunds rallied with the 10yr yield down 8bps to 1.624% while the bund yield fell by almost 4bps to 0.462%. Emerging market bonds also caught some of the rally with emerging Europe showing some signs of positivity while South African yields closed down 5bps at 10.085% though Indian yields were up slightly.

FX

• As investors moved away from risk, the dollar received a bid overnight. EURUSD fell around 0.2% to 1.1004 with the move coming largely later in the day. Plans for joint EU bonds to invest in energy and security were pushed back somewhat by the head of the EU’s budgeting office who said that funds already exist. Further EU-integration has generally been taken as a positive by markets with a stronger euro and bond market reaction.
• USDJPY added another 0.3% overnight to push above 121 for the first time since 2015. There seem to be few near term catalysts to stop the yen from falling further, particularly as the energy outlook remains highly volatile. Sterling also dipped, falling by 0.4% to 1.3205.
• USDCAD closed lower, albeit marginally, as commodity currencies benefit from rising material prices. AUDUSD added 0.4% to 0.7499 while NZDUSD added 0.14% to 0.6974.

Equities

• Equity markets were buffeted by higher oil prices once again yesterday, and the tone was largely risk-off. All three major indices in the US dropped, with the S&P 500 losing -1.2% and the NASDAQ and Dow Jones both closing -1.3% lower.
• Similary in Europe, the FTSE 100 (-0.2%), the CAC (-1.2%) and the DAX (-1.3%) all fell.
• Local stocks were boosted by the development by contrast, as the DFN added 0.4%, the Tadawul 0.5% and the ADX 1.0%.

Commodities

• Oil prices moved higher overnight as the US and EU move closer to arranging a deal to restrict flows of Russian energy. A deal may potentially come as early as this week. Also helping the bullish narrative around energy is a plan from Russian to demand payment in rubles for natural gas supplies to European economies. Disruption to a Caspian Sea pipeline is also amplifying the near-term shortage of oil supplies.
• Brent futures settled up more than 5% at USD 121.60/b and have jumped up to almost USD 124/b in early trade today while WTI added 2.8% overnight to USD 114.93/b and is up over USD 116/b in early trading this morning.
• Somewhat lost among the geopolitical headlines, US crude inventories dropped 2.5m bbl last week along with substantial declines across product stockpiles. Total inventories fell almost 7m bbl last week. US oil production remained steady at 11.6m b/d while product supplied was marginally higher.

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