28 January 2022
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US GDP picks up at end of 2021

Risk from Omicron will put the brakes on growth at the start of this year.

By Edward Bell

  • In the US labour market, initial jobless claims for the week ending January 22nd fell for the first time in the last four weeks as it would appear the negative hit to employment conditions from the Omicron variant is beginning to wane. Total initial claims were 260k, falling by 30k from a week earlier. Headline labour market data for January is likely to come in far slower than the last few months as the economy was rocked by the Omicron wave but expectations are that the disruption will be short-lived.
  • Durable goods orders in the US fell for December, down by 0.9% m/m thanks to a fall in aircraft and communication equipment purchases. Core capital goods orders showed little change on a monthly basis for December. The soft data for the end of the year reflects both an uncertain investment environment with firms likely cautious on the growth expectations for this year while supply chain disruptions are still also affecting the investment outlook.
  • The US economy expanded strongly at the end of last year with Q4 GDP rising by 6.9% annualized compared with 2.3% in Q3. With Omicron threatening to stunt growth in the early months of 2022 some slowdown is expected this while tighter monetary policy and a negative fiscal impulse will also drag on growth. While the Q4 growth numbers appear strong they largely reflect a build in inventories with domestic consumption and fixed investment rising modestly.
  • The South African Reserve Bank raised rates by 25bps to 4% in line with market expectations and the second increase in a row. The governor of the SARB, Lesetja Kganyago, noted the risk to growth posed by the normalization of policy in developed markets, particularly the US, that could lead to capital flight away from emerging markets. Similar to other markets, inflation in South Africa has risen sharply thanks to high energy costs. SARB does expect to see price gains beginning to fade later this year, however.
  • Dubai's GDP grew 6.3% y/y in the first three quarters of 2021 according to local press, citing a tweet from the Dubai's crown prince.  No detailed GDP data are available on the Dubai Statistics Centre website yet. The headline suggests that there is upside risk to our full year forecast for Dubai's GDP of 4.0% in 2021.

Today’s Economic Data and Events

  • 10:30 FR GDP y/y Q4: forecast 4.9%
  • 13:00 GE GDP y/y Q4: forecast 1.8%
  • 17:30 US Employment cost index Dec: forecast 0.5%

Fixed Income

  • After the histrionics following the January FOMC meeting, UST markets were relatively calmer overnight. Near-term yields continue to expect an imminent and sharp hiking cycle with 2yr UST yields up almost 4bps overnight to close at 1.1882% while the 10yr yield actually slipped back, down 6bps to 1.7994%.
  • In Europe, markets showed limited response to the Fed’s January meeting. Bund yields were generally higher, up by almost 3bps on the 2yr to -0.622% while the 10yr added less than 2bps to -0.06%. For gilts the moves were generally wider: 2yr gilt yields rose almost 5bps to 0.959% while the 10yr added 3bps to 1.228%.
  • Emerging markets were mixed overnight with South African 10yr bonds not showing much response to the SARB’s decision to hike rates. Indian bonds fell with yields adding almost 9bps to 6.743% on the 10y while Turkish bonds fell sharply and yields added more than 30bps to close at 21.79%, erasing some recent gains.
  • Fitch lowered its rating on Kuwait to ‘AA-‘ from ‘AA’ and put the outlook on stable. According to the rating agency, “political constraints” on policy making and a lack of any “meaningful” move away from reliance on oil exports weigh on Kuwait’s credit risk.

FX

  • Currency markets showed a violent sell-off across the board as markets look to tighter US monetary policy and a stronger dollar ahead. EURUSD fell 0.85% to 1.1145, its lowest level so far in 2022 and indeed its weakest level since June 2020. USDJPY climbed 0.6% to 115.37, not far off a recent peak but with no real barriers to further depreciation in the yen.
  • Among more risk-oriented currencies the sell-offs were equally brutal. GBPUSD fell 0.6% overnight, closing at 1.3383 even as markets have raised the chances of the Bank of England raising rates at its February meeting. For commodity currencies CAD managed to show the most resilience but was still weaker against the dollar: USDCAD added 0.57% to 1.2742. AUDUSD fell more than 1% to 0.7033 while NZDUSD fell by more than 1% to close at 0.6583.

Equities

  • Another choppy session in the US ended the day with all three major benchmark indices closing down once again, despite the strong GDP figures released earlier in the day. The NASDAQ remained under pressure, dropping -1.4%, followed by the S&P 500 which lost -0.5%. The Dow Jones closed flat. Some strong earnings results from some tech majors could see a stronger end to the week today.
  • In Europe, the FTSE 100 added 1.1%, and is one of the few major global indices to still be up so far this, year, currently by 2.3% ytd. The DAX and the CAC were more muted, adding 0.4% and 0.6% respectively.
  • Within the region, the Tadawul closed flat but locally both the ADX (0.2%) and the DFM (0.5%) closed higher. The EGX 30 lost -0.4% while the Borsa Istanbul added 2.4%, and is up 7.5% ytd.

Commodities

  • Oil prices weren’t immune to the broader sell-off overnight as Brent futures retreated from having pushed up to USD 91/b at one point mid-day. Brent settled down 0.7% at USD 89.34/b while WTI fell 0.9% to USD 86.61/b. The market will be focusing on next week’s OPEC+ meeting where consensus is for another monthly increase of 400k b/d for March. However, there may be some external pressure to increase by a larger amount, or at least to make up for some shortcomings, given the geopolitical risks surrounding oil at the moment.
  • Gold prices fell a second day running post-FOMC with spot gold down more than 1% to push below USD 1,800/troy oz. Silver extended its losses for a fifth day, down by more than 3% to USD 22.77/troy oz.

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  • Dubai's GDP grew 6.3% y/y in the first three quarters of 2021 according to local press, citing a tweet from the Dubai's crown prince.  No detailed GDP data are available on the Dubai Statistics Centre website yet. The headline suggests that there is upside risk to our full year forecast for Dubai's GDP of 4.0% in 2021.

Written By

Edward Bell Head of Market Economics


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