UK inflation remains elevated

Inflation in the UK slowed modestly in August to 9.9% y/y compared with 10.1% recorded a month earlier, largely in line with market expectations. Lower petrol prices helped to bring inflation lower although it is still at enormously elevated levels and core inflation accelerated, rising by 6.3% y/y in August compared with 6.2% a month earlier. The Bank of England has postponed its MPC meeting until next week but the elevated inflation picture may prompt the BoE to follow the Fed and ECB with a 75bps hike to the Bank Rate to push back against inflation. The new government’s energy price cap plans may help to avoid some of the more disastrous inflation projections though at a heavy fiscal price.
Industrial production in the Eurozone dropped by 2.3% m/m in July, much larger than markets had been expecting with declines across nearly all categories of output. At a country level, Ireland showed the largest decline, with output down by almost 19% m/m while Germany’s production fell by 0.7% and French industrial output dropped by 1.5%.
Tunisia’s government has reportedly agreed a wage deal with the powerful UGTT union representing public sector workers, which will see around 680,000 employees get a 3.5% wage increase. Tunisia is trying to secure an IMF deal but its high government expenditure on salaries has been a sticking point in negotiations and in past dealings with the Fund.

Today’s Economic Data and Events

Fixed Income

After big moves earlier in the week, bond markets were relatively quiet overnight with few major data catalysts to push prices one way or the other. Yields on the 2yr UST added 3bps to 3.7881% while the 10yr yield closed essentially flat at just a bit over 3.4%. Bond markets in Europe were more mixed with a modest gain in 10yr bunds, yields falling by 1bps to 1.709%, while Italian and Spanish bonds were moderately weaker.
Emerging market bonds settled weaker for the most part with 10yr local currency Turkey government bond yields up 2bps to 11.08% while South African 10yr yields added 8bps to 10.736%.

Currency markets bounced back a bit overnight with a drop in the broad dollar index after large gains following the US CPI print earlier in the week. EURUSD add 0.1% to close at 0.9981 while GBPUSD gained 0.4% to settle at 1.1539. USDJPY pulled in favour of the yen, down 1% to 143.08.
Commodity currencies also settled generally stronger. USDCAD closed little changed but with a modest bias for the loonie at 1.3165. AUDUSD added 0.27% to 0.6748 and NZDUSD added 0.1% to 0.6003.

Equities

US equity markets enjoyed some modest gains yesterday after the sharp sell-offs the day before which followed the upsize surprise on the inflation print. The Dow Jones, the S&P 500 and the NASDAQ added 0.1%, 0.3% and 0.7% respectively. They remain well down ytd, however, with the NASDAQ down -25.1%.
European markets remained under pressure yesterday, as the CAC dropped -0.4%, the DAX -1.2% and the FTSE 100 -1.5%.
Locally, the ADX dropped -0.2% and the DFM -0.8%, while Saudi Arabia’s Tadawul closed down -1.6%. However, all three remain higher than they were at the start of the year, in contrast to most global equity indices.

Commodities

Oil prices settled higher overnight with Brent futures up 1% to USD 94.10/b and WTI added 1.3% to USD 88.48/b as the IEA cautioned that product markets are likely to face considerable tightness in coming months. The US government is also considering plans to rebuild its strategic petroleum reserve, although it hasn’t indicated a “trigger price” at which it would make purchases.
The IEA lowered its oil demand expectations “marginally” in its latest monthly oil market report noting that China’s Covid-related lockdowns continue to weigh on consumption even as some fuel switching away from natural gas to oil takes place. The agency also estimates supply growth of 1.7m b/d in 2023, down from 4.8m b/d this year.