US economic data at the end of last week provided further evidence of a slowing in economic activity in March. Retail sales declined by a larger than expected -1.0% m/m at the headline level although this was largely due to a decline in new car sales and fuel prices. Higher financing costs are likely the main driver for fewer car sales however, and excluding these two components, core retail sales fell by a more modest -0.3% m/m last month. Industrial production rose 0.4% m/m at the headline level at the end of the first quarter, but this was driven by a surge in utilities as heating demand increased and masks continued weakness in manufacturing. Manufacturing output fell -0.5% m/m in March with declines across all the industry groups.
The preliminary University of Michigan consumer index showed an improvement in consumer sentiment this month, with no lasting impact from the failure of SVB which likely weighed on sentiment in March. Both current conditions and the expectations components improved in April. Short term inflation expectations increased to 4.6% from 3.6% in the March survey, perhaps due to higher petrol prices, while long term inflation expectations were unchanged at 2.9%, still much higher than the Fed would like to see. Although the consumer sentiment index has rebounded over the last 10 months, it remains at historically low levels that are consistent with the recessions in 2008-09 and the early 1980s and 1990s.
Consumer inflation in Saudi Arabia slowed to 2.7% y/y in March, the lowest annual rate of price growth since July 2022. Food prices declined -0.4% m/m following a -0.6% m/m decline in February, bringing annual food inflation down to 2.3% y/y. Clothing and household durables prices declined y/y which helped to offset higher housing costs – housing and utilities rose 0.4% m/m and 7.4% y/y. Other services costs also increased in March. We expect inflation in the kingdom to average 3% in 2023.
Saudi Arabia transferred a 4% stake in Aramco to the Saudi Arabian Investment Company (Sanabil), which is a subsidiary of the Public Investment Fund. 4% of Aramco had been transferred to PIF last February. Separately, the government announced four new economic zones to boost foreign investment in advanced manufacturing, cloud computing and medical technology. The zones are located around the kingdom in Riyadh, Jazan, Ras al-Khair and Jeddah.
In a relatively quiet data week, the focus will likely be on UK employment, inflation, and retail sales. In Europe, the final print for March CPI is due, while US data will focus on housing.
Today’s Economic Data and Events
- 16:30 US Empire Manufacturing (Apr) forecast -18.0
- 17:15 US Industrial production March. Forecast 0.2% m/m
- 18:00 University of Michigan sentiment survey April. Forecast 62
Fixed Income
- US Treasuries weakened at the end of the week as retail sales in March came in less badly than feared. Yields on the 2yr UST added 13bps to close back above the 4% handle, settling at 4.0989%. For the week as a whole, yields on the 2yr rose by about 12bps. For the 10yr, yields rose by 7bps on Friday to settle at 3.5128%.
- By the end of the week, markets had brought forward their expectation of rate cuts to July, although only marginally. The retail sales data showed activity slowing, but not as poorly as had been expected for the control group. Markets are still pricing in a terminal rate at 5.25%.
- European bonds also dropped on the final day of the trading week. Yields on 10yr bund added about 7bps to close at 2.432% while the 10yr gilt yield rose 9bps to 3.656%.
- Moody’s affirmed their ‘A1’ rating on Israel but revised the outlook from positive to stable as a result of fractious politics within the government.
- For central banks this week, Indonesia sets policy on April 18 but most action will come from central bank speakers from the ECB and Federal Reserve.
FX
- The pull higher in yields on Friday helped to stem the losses in what had otherwise been a heavy week for the dollar. The broad DXY index added 0.5% on Friday in response to the better than expected retail sales numbers but that only shaved its losses for the week as a whole to 0.5%. EURUSD dropped by 0.5% on Friday, closing at 1.0992 but still up about 0.8% for the week. GBPUSD dropped by 0.9% on Friday to close flat on the week at 1.2413 while USDJPY settled at 133.79, up 0.9% on Friday and 1.2% for the week as a whole.
- Commodity currencies had a mixed performance last week with both CAD and AUD gaining. USDCAD dropped 1% for the week, closing at 1.3374 though it did tick up by about 0.3% on Friday. AUDUSD added 0.5% for the week to close at 0.6707 but was down more than 1.1% on Friday. NZDUSD was the notable underperformer, sinking by 0.7% for the week to 0.6205 and was down more than 1.4% on Friday.
Equities
- US equity markets ended the day lower on Friday, although remained higher over the week as a whole. Despite positive earnings reports from major US banks, markets were knocked back by a larger than expected fall in retail sales in March and renewed concerns about further interest rate hikes. The S&P 500 fell 0.2%, while the Dow Jones and NASDAQ fell 0.4% and 0.35%, respectively on Friday.
- European stocks ended Friday higher, with their longest weekly gain since early December, as investors appear to be anticipating an impending pivot in central bank policy. The Euro Stoxx index closed 0.6% higher, while the CAC and the DAX both rose 0.5% on the day.
- Locally, the DFM rose 0.13% on Friday.
Commodities
- Oil prices settled higher for a fourth week in a row with Brent futures up 1.4% at USD 86.31/b and WTI pushing up 0.4% to USD 82.52/b. The IEA released its first oil market report in the wake of the surprise cuts announced earlier this month from several OPEC+ members. The agency noted that markets would endure a heavy stockdraw in the second half of the year of about 2m b/d. The IEA described the cuts as placing consumers “under siege.”