Weekly Economic Commentary – Oct 21, 2018

Markets

At the beginning of last week a negative mood lingered in global equity markets but then the positive earning results in the US gave a boost to Wall Street (US stocks jumped the most in 6 months) with the S&P vaulting above 2,800. However the enthusiasm proved short lived and at the end of the week the S&P dropped to finish the week almost unchanged. The same dynamics played out in Japan, while in Europe despite the crisis spurred by the 2019 Italian government budget, the Euro Stoxx managed to post a small weekly gain. Emerging markets remained on the back foot in the wake of the Shanghai Composite, which is having the worst month since 2016 and suffered another selloff on Thursday partially reversed on Fri. In currency markets the dollar declined sharply towards 1.14 to the euro (a 2-month low) but then rebounded over 1.15, while the yen after weakening on Mon hovered for most of the week above 112 to the USD. The Brent oil price after picking up some steam, in midweek took another dive to below USD 80/b as US crude inventories rose by 6.5 mn barrels. Gold was slowly regaining ground and consolidating its recent gains above USD 1200/ounce amid the volatility in other asset classes.

Global Developments

US/Americas:

  • The minutes of the US FOMC meeting revealed that a few participants advocated a modestly restrictive policy, while others judged it necessary to temporarily hike above their estimates of the long-run equilibrium fed funds rate. In other words, the Fed might be preparing markets for unpleasant surprises. The FOMC unanimous over the current, gradual path of normalization as all participants supported the hike on Sep 26.
  • US industrial production advanced 0.3% in Sep, vs 0.4% in Aug, the fourth consecutive monthly gain. Mining was the top-performing sector (0.5% mom), while manufacturing advanced only 0.2%.
  • US retail sales disappointed rising only 0.1% mom in Sep, the same as in Aug, probably due in part to Hurricane Florence. Vehicles were the main driver as sales ex vehicle fell -0.1% mom. Sales at gasoline stations fell -0.8% despite strong pricing. Restaurant sales plunged -1.8%.
  • The US Conference Board’s Leading Indicators Index rose 0.5% mom in Sep adding to the 0.4% rise in Aug and 0.7% in Jul. All components gained except building permits and average workweek for production workers.
  • US inventories grew  0.5% mom in Aug, vs 0.7% in Jul. Wholesalers led the gains with a 1% surge, retailers followed with a 0.7% increase, but manufacturers’ stockpiles slipped -0.1%.
  • US initial claims for unemployment benefits dropped by 5000 to 210,000. The 4-week moving average was marginally higher by 2,000 to 211,750. Continuing claims fell by 13,000 to 1.640 mn. The 4-week moving average decreased by 1,250 to 1.653 mn, a minimum since Aug 18, 1973.
  • US housing starts in Sep tumbled -5.3% mom (3.7% yoy) led by multifamily construction, mainly in the Midwest and South. Housing permits also fell slightly. US existing-home sales tumbled -3.4% mom (-4.1% yoy) in Sep.

 Europe:

  • The Eurozone’s trade surplus shrunk to EUR 11.7bn in Aug, from EUR 15.3bn a year earlier. Imports rose 8.4% yoy while exports growth was more subdued at 5.6%. Imports have been surging in recent months despite the weaker economy.
  • Moody’s downgraded Italy’s sovereign rating to Baa3, one notch above junk level, with stable outlook, as largely expected. Moody’s asserted that the government’s plans “do not amount to a coherent programme of reforms that will lift Italy’s mediocre growth performance on a sustained basis”.
  • UK inflation slowed to 2.4% in Sep, from 2.7% in Aug, due to a sharp drop in food inflation, but the core rate also cooled to 1.9% yoy, from 2.1%.
  • UK retail sales grew by 3% yoy (-0.8% mom) in Sep vs 3.5% (0.4% mom) in Aug in the wake of plunging sales in department stores and in other non-food stores.

 Asia Pacific:

  • Chinese GDP expanded 6.5% yoy in Q3 vs 6.7% in Q2, the slowest rate in a decade. As expected, investment, which grew 5.4% yoy year to date (vs 6.0% yoy in H1), was the main reason for the slowdown. Notwithstanding trade tensions, the external trade volume grew 9.9% year to date, up 2.1% from H1.
  • China’s M2 money supply growth was almost stable at 8.3% yoy in Sep vs 8.2% in Aug. Credit stayed tight, with total financing (the broadest credit and liquidity aggregate) cooling to 10.6% yoy in Sep, from 10.8% in Aug.
  • China’s inflation reached a 7-month high of 2.5% yoy in Sep from 2.3% in Aug. Food prices spiked to 3.6% yoy from 1.7% in Aug due to an epidemics of African swine fever and flooding in agricultural regions.
  • China’s industrial production growth in Sep slowed to 5.8% yoy from 6.1% in Aug. Despite the new US tariffs manufacturing output growth was buoyant in Aug, while mining had a solid performance thanks to the laxer credit conditions.
  • China’s retail trade grew 9.2% yoy in Sep, vs 9% in Aug.
  • Japan’s core inflation rose 1% yoy in Sep, up from 0.8% in Aug, due to higher oil prices. Energy costs are affecting the cost structure of industries such as transport and equipment
  • Japan’s trade balance recorded the third consecutive larger deficit. In Sep it reached JPY 238.94bn from JPY 191bn in Aug. Exports to key markets dropped for most major sectors. However, imports continued to rise yoy in the wake of higher commodity prices.
  • Singapore’s non-oil exports rose by 8.3% yoy in Sep, following a 5% rise in Aug. The jump was driven by pharmaceuticals, skyrocketed 65.7% yoy, partially offsetting a prolonged weakness in electronic shipments which fell by -0.9% yy in Sep, following the -1.5% drop in Aug.

Bottom line:The main macro news came from China and confirmed what has become the New Normal: weakening growth due to deleveraging, countered haphazardly by the authorities via preferential credit treatment. US monetary policy took once again center stage as the debate on the neutral rate and whether the US economy requires a more hawkish stance intensifies. The clearest summary of the views within the US FED FOMC, was not in the minutes to the Sep 25-26 meeting, but in the accompanying notes to the most recent economic projections. The document remarked that “A substantial majority of participants expected that … [between] end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate,”. According to the most recent projections the FOMC members’ median estimate of long-run rate (aka neutral rate) was 3%. Over the long run, short-term yields should fluctuate around the nominal GDP growth rate, and the long end should be higher, reflecting the risk and term premia. In the 25 years before the 2008 Great Recession, the spread 2y – 10y year was about 75bp. In essence the Fed is trying to achieve a soft landing for the economy, but markets are concerned that somewhere along the road the bond market will be disrupted, not to mention the impact on emerging markets. The ECB on the contrary seems comfortable in its current wait-and-see attitude and senior policy makers hinted that the current negative rates will not be hiked until mid-2019.

Regional Developments

  • Bahrain toppedamong MENA region countries in the World Bank’s Human Capital Index which quantifies the contribution of health and education to the productivity of the next generation. Bahrain’s performance in education was notable, with a child spending an average 13.3 years at school by the time they reach 18. (More: http://www.worldbank.org/en/publication/human-capital)   
  • Egypt plans to issue its first international sovereign Sukuk in the 2019-2020 financial year, according to the finance minister.
  • Egypt’s foreign reserves were at USD 44.459bn at end-Sep, sufficient to cover imports for nine months, according to the planning ministry.
  • Egypt secured a new USD 3bn financing deal with the World Bank– similar to a 2016 loan of similar size – in a bid to support economic growth, revealed the investment ministry.
  • Egypt and China have signed deals worth USD 18bn as part of the Belt and Road initiative, according to the former’s investment minister, who also clarified that the country was accepting only mutually beneficial projects.
  • E-commerce companies in Egypt will be subject to VATand are obliged to pay taxes at the end of each month.
  • Egypt’s mobile subscribers declined by 3.4% qoq to 95.7mn in Q2 this year, according to the ministry of communications and information technology. Mobile internet users increased by 4.2% to 32.8mn.
  • Iraq plans to increase oil exports from its southern ports to 4mn barrels per day (bpd) by Q1 2019, from around 3.62mn bpd currently.
  • The Nassib border crossing between Jordan and Syria was opened last week after being closed for 3 years.
  • Kuwait’s trade surplus with Japan narrowed by 6.9% yoy to JPY 46.5trn (USD 414mn) in Sep for the first time in 4 months. Trade continues to be in surplus territory for 10 years and 8 months.
  • Consumer spending remains robust in Kuwait, according to a recent NBK report. The level of spending on credit and debit cards increased 16.6% yoy in Q2 2018, while total spending, including ATM withdrawals, increased by 9.9%.
  • Broad money supply (M2) in Oman grew by 3.1% yoy to OMR 16.5bn at the end of Jul. During this period, narrow money stock (M1) recorded a marginal growth of 0.1% yoy to OMR 5.1bn, while quasi-money increased 4.5% yoy.
  • Qatar’s real estate deals fell 13% mom to QAR 1.3bn (USD 354mn) in Sep, with Doha seeing the highest real estate deals (QAR 466.9mn).
  • Saudi Arabia’s credit default swaps(CDS) increased to 100 bps last Fri, the highest since June this year.
  • Saudi unemployment remained at a record highof 12.9% in Q2 this year. The number of Saudi citizens in employment fell to 3.13mn in Q2 (Q1: 3.15mn).
  • Saudi oil exports grewby 1.3% mom and 7.5% yoy to 7.21mn barrels in Aug, according to data from the Joint Organisations Data Initiative.
  • The Saudi power sector needs USD 20bn of investments in the next five years to meet rising demand, according to a report by Apicorp. The demand for power has increased by 6.6% per year since 2006.
  • Volume of logistics servicesin Saudi Arabia is expected to touch SAR 70bn (USD 19bn) by 2020 from SAR 65bn currently, disclosed the minister of transport.
  • Saudi Arabia will restore the payment of annual allowances from next year as per previous conditions (before it was suspended in Sep 2016), according to local media reports.
  • An MoU between UK and Saudi Arabia will “soon” allow British citizens travelling to Saudi Arabia to apply for longer-term visas(ranging from three, four or five years).

UAE Focus

  • Abu Dhabi’s nominal GDP grew by 15.3% yoy to AED 232.7bn (USD 63.3bn) in Q2 this year, with non-oil GDP up by 4.4% to AED 137.9bn. Oil GDP was up 36% to AED 94.8bn, accounting for 40.7% of the Q2 GDP.
  • Money supply (M2) in the UAE increased by 0.95% mom and 2.7% yoy to AED 1.291trn in Sep. Foreign currency assets increased to AED 329.3bn in Aug, from AED326bn in early 2018.
  • UAE banks issued AED 12.2bn (USD 3.32bn) worth letters of credit – a proxy for non-oil sector activity -in Jan-Aug this year. Value of letters of guarantees issued by the banks amounted to AED 1.7bn and AED 9.5bn in Q1 and Q2 respectively.
  • Inflation in Dubai fell to the lowest this year: annual inflation was 1.1% yoy in Sep (-0.8% mom), with housing and utility costs down 3.9% yoy in Sep (Aug: -3.6%) while food and beverage costs and transport prices were up by 3.1% and 13.1% respectively.
  • Dubai’s Department of Economic Development issued 13,825 new licenses in Jan-Sep 2018, of which 61.2% were commercial licenses. Above 200k business registration and licensing transactions were completed during this period. Indians, Pakistanis and Chinese were among the top nationalities to secure new licenses in Sep.
  • The Sharjah Debt Settlement Committee approved a AED 54.68mn (USD 14.7mn) debt repayment plan to settle financial debt cases of Sharjah citizens.
  • Dubai’s expansion plans for the Al Maktoum airport has been delayed till 2030 (5 years later than previously announced), according to the government.
  • The World Economic Forum’s Global Competitiveness Report 2018 ranks the UAE 27th globally, with its score rising to 73.4 from the previous edition’s 72.3. UAE has improved its skills base (53rd, up 1.4 points), the depth of its financial system (35th, up 4.5 points) and its business dynamism (33rd, up 3.8 points). More: http://reports.weforum.org/global-competitiveness-report-2018/
  • UAE closed 14 M&A transactions in Q3, representing nearly half of the 29 deals signed off in the GCC during this period, according a report from Markaz.
  • More than 25% of the world’s 500 largest companies have UAE as the regional base of their operations in the MENA region.
  • Abu Dhabi construction cost index (CCI) increased by 0.2% qoq and 3.2% yoy to 99.1 during Q2 2018, according to Statistics Centre Abu Dhabi. The manpower group (weight of 29.5%) contributed to the overall qoq increase in the prices, rising by 8.1%.
  • Hotel occupancy rates in Abu Dhabi were down 7.4% in Sep, with demand down 2.6% amidst a 5.1% increase in supply; average daily rate fell by 1.9%, according to STR’s preliminary data.

Media Review

Do not underestimate the deglobalization

https://www.ft.com/content/df3ded82-ce32-11e8-b276-b9069bde0956

An imminent spike in oil prices?

https://oilprice.com/Energy/Gas-Prices/Are-Natural-Gas-Prices-Set-To-Spike.html

The Chinese put

http://businessweekme.com/chinas-new-strategy-for-curbing-worlds-worst-stock-slide/

Saudi sovereign fund’s investments abroad

https://uk.reuters.com/article/saudi-politics-fund-investment/factbox-saudi-sovereign-funds-investments-abroad-idUKL8N1WV4HI

Is China about to launch its own cryptocurrency?

https://www.weforum.org/agenda/2018/10/is-china-about-to-launch-its-own-cryptocurrency/

 

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