US CPI remains above Fed's 2% inflation target rate

The US consumer price index rose 0.6%m/m in January the biggest m/m increase since February 2013, following a 0.3%m/m rise in December.  In the 12 months through January the CPI jumped 2.5%, the biggest such increases in almost 4 years following a 2.1% y/y rise in December. The core CPI increased 0.3% m/m following a 0.2% m/m gain in December, and 2.3% y/y in January against 2.2% y/y in December. The data adds to the argument for raising interest rates earlier than expected, with the markets now seeing a 44% chance of a March move. 

US retail sales beat expectations in January rising 0.4% m/m, and 5.6% y/y, with core retail sales, the component most closely correlated to the consumer spending component of GDP climbing 0.4%. December retail sales data were revised upwards to show a 1.0% rise against an earlier reading of 0.6%. Sales of electronics and appliances boosted the January print, with households spending more on dinning out, sporting goods and hobbies.

US Industrial production fell 0.3% in January as unseasonably warm weather reduced demand for utilities. The measure which compromises manufacturing, mining, and electrical and gas utilities, was dragged down by a 5.7% drop in utilities as demand for heating was weak. However manufacturing and mining output rose 0.2% and 2.8% m/m respectively.

UK wage growth slowed towards the end of 2016, however employment in the three months to December picked up after two previous reports reflected falling employment. The ONS data showed that employment hit a new high of 74.6% between October to December 2016, while the unemployment rate held an 11 year low of 4.8%. Total earning in the three months to December slowed to 2.6% against 2.8% in the three months to November.  

US CPI remains above Fed's 2% inflation target range

Source: Emirates NBD Research, Bloomberg

Fixed Income

Better than expected retail sales and higher than expected inflation data in the US justified a relatively upbeat senate banking committee testimony by Fed Chair, Janet Yellen and caused treasury yields to rise. Probability of a rate hike in March has now soared to 44% from 28% last week.  Yields on 2yr and 10yr UST rose by 2bps each to 1.25% and 2.49% respectively while 30yr was up a bp to 3.07%.

Sovereign bonds in the Eurozone traded within narrow ranges with Bund yields closing less than a bp up to 0.37% and Gilt yields down by a bp to 1.29%. Global credit spreads reflected minimal reaction to positive macro data with US IG and Euro Main closing close to opening levels at 63bps and 72bps respectively.

GCC bonds reflected slight pressure from rising credit spreads amid stable oil prices, possibly in response to rising new supply. BUAEUL index yield closed at 3.07% (+5bps).  In the primary market Ahli Bank priced  $500 million 5yr bond at MS+155bps, 20bps tighter than initial guidance and KIPCO released IPT in the 4.875% area for  its $500 million 10 year bond.

FX

Despite strong inflation data (see above), the US dollar pared gains from earlier in the session and finished the day softer against most of the other majors. These declines have continued this morning and the Dollar Index currently trades 0.22% lower at 100.95. We expect further declines to be limited as the fundamentals behind the US dollar remain supportive with the odds of an interest rate hike in March increasing (see above). We expect the first level of support to be near the 30 day MA of 100.724.

Equities

Developed market equities closed higher as banking sector stocks derived strength Janet Yellen’s stance on rate hikes in the US. The S&P 500 index and the Euro Stoxx 600 index added +0.5% and +0.3% respectively.

Asian equities are trading mixed this morning. The Nikkei index was trading -0.7% at the time of this writing as the JPY strengthened below 114.

It was largely a positive day of trading for regional equities. The Bloomberg GCC 200 index gained +0.6%.

The DFM declined -0.2% as focus remained on midcap stocks. Arabtec lost a further -5.6% to take its losses to -22.5% since announcing its 2016 earnings. However, the stock found some support at AED 1.0 level. The Tadawul (+0.6%) drifted higher on low volumes. Dallah Healthcare (+2.6%) and Dar Al Arkan (+3.1%) led the gains.

Commodities

Inventories of crude oil in the US hit a new record level of over 518m bbl last week thanks to the sixth consecutive weekly build in stocks. Despite the fact that nearly 40m bbl of crude have been put into storage in the US in the last month and a half oil markets responded to the data with casual insouciance; WTI futures dipped less than 0.2% and Brent dropped 0.4%. Production held steady while exports from the US jumped 459k b/d in one week to a new high of over 1m b/d. If these export levels are sustained they would take some of the bite out of OPEC's cuts in their effort to balance the market.

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