Weekly Economic Commentary – Sep 9, 2018

9 September, 2018
read 9 minutes


The return to the trading floors of Wall Street after the Labour Day weekend has not been particularly cheerful. Concerns over the trade tensions were re-ignited by Trump’s announcement of additional duties on a further USD 267bn of Chinese imports. Moreover, an uneasy feeling is spreading among investors that valuations have entered a fantasyland where a company perennially in the red like Amazon exceeds USD a one trillion market cap. The S&P 500 suffered its first four-day losing streak in a month and the tech stocks were the main target of sale orders. Trade tensions and strong US macro data (which imply steeper interest rates hikes) hit not only emerging markets stocks, but also the European and Japanese bourses. However, regional markets with the exception of KSA contained the losses with Bahrain and Oman actually posting gains thanks to buoyant oil prices. In currency markets the dollar benefited somewhat from the improved macro outlook, while the GBP jumped after transcripts published the UK parliament revealed that the EU’s chief negotiator was open to discussing alternative backstops to the Brexit agreement. Conversely, data showing that South Africa entered a recession in Q2 put most EM currencies on the back foot. Oil prices were essentially stable after few intraday gyrations, as tight supply conditions (US crude oil inventories fell by -4.3 mn barrels vs predictions of a -2.4 mn draw) support the bulls. The gold price stays under pressure and the USD 1200/ounce, which once was a floor, has become a ceiling, confirming that even in these times of global tensions precious metals are not seen anymore as a safe haven.

Global Developments


  • The US non-farm payroll added 201,000 jobs in Aug, vs 147,000 in Jul, topping a record-breaking streak of uninterrupted job growth data. The 3-month average stood at 185,000 units with the unemployment rate steady at 3.9%. The percentage of people stuck in part-time jobs for lack of full-time alternatives, fell to 7.4%, compared with 8.6% a year earlier.
  • US average hourly earnings rose 2.9% yoy in Aug vs 2.7% in Jul, the fastest pace since Jun 2009, exacerbating fears of an inflation spike. More businesses are reporting problems in filling vacancies.
  • The ISM manufacturing index for the US in Aug surged from 58.1 to 61.3, smashing expectations. Production, employment and new orders index all gained consistently. Despite the fuss over trade wars manufacturing appears in remarkably good shape.
  • The ISM non-manufacturing index for the US rebounded strongly from 55.7 in Jul to 58.5 in Aug.
  • US factory orders fell -0.8% mom in Jul after 0.7% in Jun. However, the key core capital goods segment rose 1.6% mom.
  • US initial jobless claims fell by 10,000 to 203,000. The 4-week moving average declined by 2,750 to 209,500, the lowest level since Dec 6, 1969. Continuing claims fell from 1.71 mn to 1.707 mn.
  • Brazil’s industrial production rose 3.1% yoy sa in Jul vs 3.9% in Jun.


  • The final estimate of the Eurozone Q2 GDP confirmed growth at 0.4% qoq (2.1% yoy), unchanged from Q1 (2.4% yoy).
  • Retail sales in the Eurozone dropped -0.2% mom in Jul, vs 0.3% in Jun, due to lower expenditures on food, drink and tobacco (-0.6% vs 0.5% in June) and automotive fuel (-0.7% vs 0.8%).
  • German industrial production unexpectedly contracted by -1.1% mom in Jul deepening the -0.7% drop in Jun. The only bright spot was construction.
  • German industrial orders dropped unexpectedly by -0.9% in Jul, which added to the -3.9% fall in Jun. Foreign orders tumbled -3.4%, with those from the Eurozone down -2.7% and those from extra EU -4%.
  • The German trade surplus fell to EUR 16.5bn in Jul from EUR 18.8bn a year earlier. Imports jumped 12% to an all-time high while exports rose at a softer 7.6%.

Asia Pacific:

  • The Caixin China manufacturing PMI fell to a 14-month low of 50.6 in Aug from 50.8 in Jul. New orders grew at the lowers pace since May 2017, while new export orders declined for the 5th consecutive month and employment remained on a downward trend. Confidence was close to Jun’s 6-month low.
  • The Caixin China services PMI fell to a 10-month low of 51.5 in Aug from 52.8 in Jul.
  • China’s trade surplus shrunk sharply to USD 27.91bn in Aug from USD 40.05bn a year earlier. Imports jumped 20% to USD 185.56bn while exports rose 9.8% to USD 210.1bn. Over the first 8 months of 2018, the surplus fell to USD 194.55bn from USD 272.84bn in the same period of 2017. The politically sensitive surplus with the US, widened to a fresh record high of USD 31.05 bn.
  • Australia’s GDP jumped 0.9% qoq (3.4% yoy) in Q2, adding to the 1.1% gain (3.2% yoy) in Q1, way above expectations. The main driver was private consumption followed by government spending and real estate investments.
  • The Leading economic index in Japan declined to 103.5 in Jul from 104.6 in Jun.
  • The Nikkei India manufacturing PMI retreated to 51.7 in Aug from 52.3 Jul. Both output and new orders were little changed, and sentiment weakened. Job creation remained insignificant.
  • India’s current account deficit widened slightly to USD 15.8bn or 2.4% of GDP in Q2 from USD 14.9bn a year earlier (2.5% of GDP).
  • Korean GDP growth slowed to 0.6% qoq (2.8% yoy) in Q2 from 1% (2.8% yoy) in Q1 confirming that domestic demand is sluggish.
  • South Korean inflation in Aug eased to 1.4% yoy from 1.5% in Jul, due to a decline in utilities inflation.

Bottom line: The expansion remains robust, but international politics loom as a key downside risk. Germany in particular last week reserved a few negative surprises which underscore the uncertainty over the outcome of the mercantilist offensive waged by the White House. The malaise in China and EU is palpable and is affecting emerging markets, already under pressure from the US interest rate hikes. Moreover, policy makers, firms and markets are desperately trying to assess what the New Normal will be ten years after Lehman’s demise. If a paradigm of normality were the world before the Great Recession, the US 10-year Treasury yield should be about 130 bps above the Fed funds rate, i.e. the average from 1985 to 2007. Current US fiscal policy further complicates forecasting a return to normal. The stimulus will partially reverse by 2020, creating a potential drag on growth and potentially leaving the US debt burden on a dangerous trajectory.

Regional Developments

  • Egypt’s finance minister disclosed that a budget deficit of 8.4% of GDP is being targeted this fiscal year, compared to 9.8% in 2017-18. Separately, Egypt cancelled three and seven-year treasury bond sales last week – an auction that had had a total value of EGP 3.5bn (USD 196mn), stating that the interest rates required were “not within the logical limits”, although it was covered 1.6 times.
  • Non-oil private sector activity in Egypt, measured by the PMI, edged up to 50.5 in Aug (Jul: 50.3), thanks to a rise in new orders (linked to strong demand from domestic and foreign markets).
  • Egypt’s net foreign reserves increased to USD 44.42bn at end-Aug (Jul: USD 44.314bn). The central bank also disclosed that domestic liquidity in Egypt grew by 17.8% yoy and 1.2% mom to EGP 3.49trn at end-Jul.
  • Egypt plans to finalise rules for short selling of shares by end of this month, with a view to launch in “early 2019”.
  • Foreign holdings of Egyptian treasuries continued to decline, down -2.3% mom to USD 17.1bn at end-Jul.
  • Egypt’s gas output increased to 6.6bn cubic feet per day, after a rise in production at the Zohr offshore gas field to 2bn cubic feet per day.
  • Iraq’s parliament held its first session since the May election, but failed to elect a speaker, and decided to put off their next meeting till Sep 15.
  • Real estate market volume in Jordan dropped by 13% yoy to JOD 3.5bn (USD 5bn)  as of Aug 2018.
  • Kuwait plans to request the parliament for a swift approval of the new selective tax to be imposed on cigarettes, tobacco products, and energy and soda drinks. Revenues from the tax is estimated at KWD 200mn, in addition to the health benefits.
  • Fifteen companies in Kuwait are reportedly considering a merger to avoid bankruptcy before end-2018, reported Al-Shahed
  • Kuwait’s crude oil exports to Japan fell for a third consecutive month, declining by 5.3% yoy to 216,000 barrels per day (bpd). Japan’s overall imports of crude oil plunged 17.8% yoy to 2.9mn bpd for the second straight monthly fall; shipments from the Middle East accounted for 88.8% of the total.
  • Remittances from Kuwait to Philippines declined by 16% yoy to KWD 106.1mn (USD 351mn) in H1 2018, according to data released by the Central Bank of the Philippines.
  • Lebanon’s PMI clocked in at 45.6 in Augthe second-lowest since Oct 2016 – and up only slightly from Jul’s 21-month low of 45.4. Weak demand was the main reason for PMI to stay within contractionary territory.
  • Oman’s PPI inflation rose by 17.7% qoq in Q2, mainly driven by the 20.6%. surge in oil and gas prices.
  • Qatar’s non-oil business conditions softened, with the PMI reading down to 50.4 in Aug from Jul’s 52. Though the rate of expansion slowed to a one-year low, growth of new business remained robust and job creation reached a record high.
  • The Qatar central bank disclosed the sale of conventional bonds and Sukuk worth QAR 7.85bn (USD 2.16bn) and separately, another QAR 1.1bn (USD 302mn) worth T-bills.
  • Turkey and Qatar are signing an economic and trade partnership agreement, which will enable the former to secure cheaper supply of refined oil products and natural gas, according to the Turkish trade ministry.
  • Qatar plans to invest EUR 10bn (USD 11.64bn) into Germany in the next five years, stated Qatar’s emir at a German-Qatari investment conference. Bilateral trade between the two nations was around EUR 2.8bn, though the volume declined in 2017.
  • Qatar amended its residency law to allow foreign workers to leave the country without exit permits from their employers. Employers will however still be allowed to require up to 5% of their workforce to request permission to leave.
  • Saudi Arabia’s PMI reported the fastest growth this year, with the index reading at 55.1 in Aug vs. 54.9 in Jul. Output and new orders both increased: the former rising to 59.7 from 58.8 and orders up to 59 from 58.5 in the previous month.
  • Saudi Arabia’s Public Investment Fund is set to sign a USD 11bn syndicated loan this week, reported Reuters, citing banking sources.
  • Saudi Aramco is in talks with banks regarding a potential debt financing of up to USD 70bn to back its majority stake acquisition in Sabic, reported Reuters.
  • MSCI and Tadawul agreed to jointly launch a tradeable index later this year. Tadawul will introduce exchange-traded derivatives in H1 2019 and also launch options at an unspecified time after the launch of stock index futures.
  • Saudi Arabia’s finance ministry sold SAR 4.0bn (USD 1.1bn) of domestic Sukuk in its monthly auction by re-opening an issue originally made in July.
  • Saudi Arabia’s Ministry of Justice disclosed that digital transformation plans (online legal services, digitized procedures etc.) within the ministry had increased the level of productivity by 40% in the past two years; enforcement courts were able to raise their hourly productivity by 87%.
  • Middle East carriers posted a 4.8% yoy increase in international travel demand for Jul (Jun: 11.2%), according to International Air Transport Association (Iata) data. This compares to the 5.3% growth in overall traffic demand, and the fastest traffic growth reported in Asia Pacific (+7.5%).
  • UAE, Saudi Arabia and Kuwait topped “halal” tourism expenditures in 2017, spending USD 17.6bn, USD 16.1bn and USD 10.7bn respectively. While the GCC nations account for highest spending when travelling abroad, South East Asia continues to dominate with respect to the number of Muslim tourists.

UAE Focus

  • PMI in UAE slowed to a 5-month low of 55.0 in Aug (Jul: 55.8), as growth in new orders and employment shrank to a 20-month low and for the first time on record respectively, and in spite of output growth accelerating to 63.1 last month from Jul’s 61.9.
  • Transformational industries’ contribution to real non-oil GDP in the UAE increased to 11.8% in 2017 from 11.7% the year before, according to UAE Ministry of Economy statistics.
  • S&P lowered its rating on two Dubai state-owned enterprises, citing deteriorating credit conditions and a weakening economy in the emirate: Dubai Electricity and Water Authority was downgraded to BBB from BBB+, alongside a negative outlook; DIFC Investments (DIFCI) was rated BBB-minus, one step above junk status, from BBB, but with a stable outlook.
  • Discussions are underway for a potential three-way bank merger in the UAE between Abu Dhabi Commercial Bank, Union National Bank and privately held Al Hilal Bank, reported Bloomberg.
  • Net income of Abu Dhabi banks touched AED 8.7bn in Q2 2018, with commercial banks’ net income accounting for about 85% of total income. The number of employees at Abu Dhabi’s commercial and Islamic banks reached 11,800 at end-Jun, and their total compensation grew by 10.2% yoy in Q2.
  • The accumulated balance of non-resident deposits in the UAE increased to AED 196.1bn – the highest level in two years – as of end-Jun. Non-resident deposits constitute 11.5% of gross deposits of AED 1.7 trn with banks.
  • Abu Dhabi-Oman bilateral trade increased by 54.5% yoy to AED 1.7bn in Jan-May 2018, and compares to total trade of AED 3bn recorded for the full year 2017.
  • UAE-UK bilateral trade grew by 12% yoy to GBP 17.5bn (USD 22.4bn) in 2017, with British exports to the country reaching GBP 11.1bn last year.
  • The number of business licenses issued in the UAE grew to 532k by end-Aug, recording a 9% increase since end-2017. Abu Dhabi and Dubai accounted for around 85% of the licenses issued.
  • The Abu Dhabi Global Market (ADGM) announced a new commercial license for Tech Start-ups: the license is sector-agnostic and provides entrepreneurs an ADGM operational license.
  • Online shopping is gaining speed in the UAE: residents are expected to spend about AED 36mn (USD 9.8bn) on online shopping this year, according to the Fourth Annual Cross-border Commerce report released by PayPal and Ipsos. Cross-border shopping has grown to an estimated AED 12.5bn of all online spend in 2017: around 61% of residents shopping online bought items from websites in another country in the last 12 months (+33% from the year before). The report can be accessed at: https://www.paypalobjects.com/digitalassets/c/website/marketing/global/shared/global/media-resources/documents/PayPal_Insights_2018_Global_Report.pdf

Media Review
Debate: Stiglitz vs. Summers on Secular Stagnation
The EU battles fake news via social media
How China went from a business opportunity to Enemy no. 1
China is losing the new Cold War
An update on the shale  
Oil market fundamental
Earnings yields, equity carry and risk premia
Yemen peace talk fail
Saudi crude exports to U.S. jump as it moves to recapture share
Saudi Arabia, Saudization, unemployment
https://bit.ly/2MMMoJX (Arabic)
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