ECB hikes by 50bps

The ECB hiked its benchmark interest rate by 50bps yesterday, taking it to 3.0%. While there had been questions around whether the bank would follow through with its pledge for a half a percent move in the wake of recent unease in the banking sector, the statement made clear that its priority remains squarely on tackling inflation. There was more uncertainty over future moves given recent events, but ECB president Christine Largade stressed that the banking sector was in a more secure position than it was in 2008. Inflation projections were lowered from 6.3% to 5.3%, but this remains well above the bank’s target rate, and the outlook for core inflation was ramped up. The ECB said that the “elevated level of uncertainty” meant that they would take a “data-dependent” approach to setting policy, rather than making relying on forward guidance to help shape policy and markets’ assumptions of policy directions. The previous pledge to keep ‘raising interest rates significantly at a steady pace’ was abandoned, which should provide some flexibility on the next steps taken by the bank if inflation does start to slow down and strain in financial markets persists. The bank also noted that the overall eurozone banking system is ‘resilient’ as it monitors the financial stress stemming from the collapse of Silicon Valley Bank and strains on Credit Suisse but also said that it stood by to provide ‘liquidity support’ as needed.

US initial jobless claims came in at 192,000 in the week to March 11, coming in under consensus projections of 205,000 and marking a slowdon from the 212,000 recorded the previous week. This was the biggest fall in the reading since July, illustrating ongoing strength in the US labour market in the week of two consecutive months of upside surprises on the NFP report.

Tax revenue in the UAE was up 29% y/y in Q4 of last year, rising from AED 58bn to AED 75bn. Total revenue was up 7% y/y to AED 143.1bn. Meanwhile, total expenditure was at AED 120.3bn, down from AED 136.2bn in Q4 2022.

DP World released its 2022 financial results yesterday, announcing net profits of USD 5bn as revenue rose 58% to USD 17.1bn. The revenues were driven by acquisitions of new port facilities, and by robust throughput growth at existing facilities.

Today’s Economic Data and Events

• 18:00 US University of Michigan index, March preliminary. Forecast: 67.0
• 17:15 US industrial production, February, % m/m. Forecast: 0.2%

Fixed Income

• US Treasury markets had another double-digit move in yields, this time higher, as markets took some relief that the strain in financial markets will be contained. Yields on the 2yr UST jumped 27bps to 4.1572% and are edging higher in early trade today while the 10yr UST yield rose by 12bps to 3.577%. Markets have also tempered their pricing of Fed rate cuts following the 50bps hike from the European Central Bank yesterday.
• Eurozone bonds sold off following the ECB’s 50bps hike to policy rates as the commentary and policy action seemed to restore some confidence in local markets. Yields on 2yr German bonds rose 20bps to 2.573% while French and Italian yields also pushed higher. Gilts also dropped with yields up 12bps to 3.378%.
• Emerging market had a rough showing overnight with yields higher on South African and Turkish 10yrs while Indian bonds were the standout, managing a modest gain overnight.

FX

• The dollar sold off overnight as risk appetite returned and was even bolstered by some of the moves taken by monetary authorities and financial regulators. EURUSD showed relatively little reaction to the ECB’s large move, adding 0.3% to close at 1.061. GBPUSD was also bid upward, adding 0.4% to 1.2109 while USDJPY moved higher by 0.2% to 133.74 as investors moved away from haven assets.
• Commodity currencies also managed to rally with USDCAD down 0.3% at 1.3721 while AUDUSD gained 0.6% to 0.6656 and NZDUSD rose by 0.2% to 0.6197.

Equities

• Equity markets took a breather yesterday, with most major indices enjoying gains as concerns around the banking sector were eased somewhat. In Europe, the CAC added 2.0%, with the DAX gaining 1.6% and the FTSE 100 0.9%.
• In the US, the NASDAQ was the major gainer as it closed 1.5% higher. The Dow Jones added 1.2% and the S&P 500 1.8%.
• Locally, the DFM closed down 0.1% while the ADX dropped 0.9%. Al Ansari Financial Services had its IPO yesterday, with orders received for all shares on offer within an hour.

Commodities

• Oil prices managed to push higher overnight amid the noise in financial markets. Brent futures added 1.4% to USD 74.70/b while WTI gained 1.1% to USD 68.35/b. The energy ministers of both Saudi Arabia and Russia met overnight and reaffirmed their commitment to current OPEC+ production plans.