World Economic Forum annual meeting begins in Davos

• The World Economic Forum has begun its annual meeting in Davos, Switzerland. This is the first meeting since prior to the pandemic with key policy makers from around the world set to meet and try and formulate solutions to the multiple challenges facing the global economy presently. The theme for the meeting this year is History at a Turning Point: Government Policies and Business Strategies.
• UK retail sales held up in April despite the mounting pressure on households from the cost-of-living crisis as they expanded 1.4% m/m. This was far in excess of the consensus prediction of a -0.3% contraction and also compares favourably to the -1.2% decline in March. Given that the sales data covers a period when inflation hit 9.0% y/y, and consumer confidence has sunk to new lows, the figures are on the face of it encouraging. However, sales were boosted by spending on alcohol and tobacco at supermarkets in particular, potentially indicating a greater turn towards home entertainment as the cost of going out mounts.
• Saudi Arabia’s Public Investment Fund has acquired 16.9% of Prince Alwaleed bin Talal’s Kingdom Holding Co. A further 5% is set to be listed on the Saudi stock exchange with 78.1% remaining under the control of Prince Alwaleed.

Today’s Economic Data and Events

12:00 Germany IFO business climate (May) forecast 91.3

Fixed Income

• US Treasury markets endured a volatile week of trading as waxing and waning risk sentiment and still hawkish commentary from Federal Reserve officials weighed on the market. Treasuries closed higher at the end of the week with yields on the 2yr UST down almost 3bps at 2.5807% though over the course of the week the 2yr UST was nearly unchanged. On the longer end, the 10yr UST yield fell almost 6bps on Friday to 2.7811%, taking the weekly drop to nearly 14bps. The yield curve flattened to 19bps last week, from more than 30bps a week prior although most indicators should suggest it is bear flattening.
• James Bullard, president of the St Louis Federal Reserve bank, said that the Fed could be in a position to cut rates by 2023 or 2024 if they front-loaded enough hikes this year to tackle inflation. Markets, and ourselves, are expecting terminal rates to peak in 2023 before either easing inflation pressures or a considerable downswing in the economy forces the Fed to ease off on tightening policy.
• European bond markets were mixed to close out the trading week. The 2yr Schatz managed to gain modestly on Friday though was still considerably lower on the week, with yields up by almost 23bps to 0.327%. The 10yr bund yield was near unchanged over the week as a whole as the market preps for rates hikes as early as July from the ECB. In the gilt market, 2yr gilts plummeted with yields up by 26bps to 1.4940% on the week, with a modest rise on Friday. The 10yr gilt yield added 3bps on Friday to bring the weekly change up to 15bps, closing at 1.892%.
• In emerging markets, South African 10yrs were the standout with yields down by 22bps to 10.18% even as the SARB had hiked rates. In India, the 10yr yield added 4bps to 7.356%.
• In central bank action this week, Bank Indonesia sets policy on May 24th, the RBNZ meets on May 25th while Turkey and South Korea set policy on the 26th. The minutes of the May FOMC meeting will also be published mid-week. 

FX

• The dollar took a battering last week as markets oscillated between risk-on and -off. The DXY index dropped by more than 1.35%, its first weekly decline since the start of April and its largest fall since February. EURUSD provided much of the ammunition to take down the dollar last week with a 1.46% rise in the single currency to 1.0564. GBPUSD also had a strong week, up 1.78% to 1.248 while USDJPY fell 1% to 127.88.
• While the dollar dropped last week we doubt that this is the start of a broad sell-off in the greenback given how much more aggressively hawkish the Federal Reserve is compared with other developed market central banks and also given the context of still elevated risks that support a rush to havens.
• Commodity currencies also fared well with USDCAD down 0.69% to 1.2840 and AUDUSD up by 1.4% to 0.704. NZDUSD added 1.88% last week ahead of this week’s RBNZ meeting where another 50bps hike is expected.

Equities

• Despite some swings through the course of the week, global equity markets had a better five days by and large than seen the previous week and some losses were pared in most major indices following robust gains on Friday in particular. Moves by the PBOC to support growth in China through cutting the five-year loan prime rate had instilled a note of optimism to markets that morning.
• In Asia, the Hang Seng added 3.0% on Friday for a w/w gain of the same, while gains at the end of the week for the Shanghai Composite and the Nikkei managed to push them both into positive territory also, closing up 1.5% and 1.0% w/w respectively.
• There was a similar story in Europe, where a recovery on Friday managed to recoup most of the losses seen on a particularly bad session the previous day, although a moderation towards the end of the day meant they still closed lower than the previous Friday. The FTSE 100 ended the week down -0.4% w/w, while the DAX lost -0.3% and the CAC -1.2%.
• In the US, the Dow Jones closed down -2.9% w/w, the S&P 500 -3.0% and the NASDAQ -3.8%.

Commodities

• Oil prices for the most part managed to survive the broad sell-off in risk assets with Brent futures adding 0.9% to USD 112.55/b last week and WTI closing up 2.5% at USD 113.23/b. For now, signs of still decent demand activity are countering recession fears and financial market volatility. Futures markets are still pricing in decent tightness in oil markets with the 1-2 month spread in Brent ending at a backwardation of USD 2.56/b, up from USD 1.80/b a week earlier.
• There was a considerable jump in drilling activity in the US last week with 13 new rigs added to the oil rig count. Oil production in the US has still not shown much improvement since the start of the year even as drilling activity has steadily increased.

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