Economics Weekly
01st – 05th August2022

Euro Area GDP rose by 0.7% in Q2CY22 (QoQ) beating expectations of a 0.2% increase. US PCE price index, Fed’s preferred measure of inflation, rose to 6.8% in Jun’22 from 6.3% even as University of Michigan’s survey showed that consumers’ inflation expectations eased in Jul’22. Latest PMI readings from China suggested a moderation in activity due to recent Covid-19 outbreaks. While manufacturing PMI fell to 49 in Jul’22 (from 50.2), services PMI too edged down to 53.8 from 54.7 in Jun’22. In the current week, apart from manufacturing PMI of major economies, rate decisions of RBI, RBA and BoE will remain in focus.

Global indices ended largely higher. Better than expected GDP data from the Euro Area lifted investor sentiments. US stocks surged higher tracking strong earnings report and positive forward guidance from major tech companies. Sensex too surged to a 3-month high supported by gains in metals and oil&gas stocks. It is trading higher today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except GBP (lower) and CNY (flat), other global currencies closed higher against the dollar. DXY fell by 0.4% as University of Michigan survey showed that consumers’ inflation expectations moderated in Jul’22. EUR gained 0.2% as Euro Area’s GDP expanded more than expected in Q2CY22. INR appreciated by 0.6%-its largest single day gain since Oct’21, as FPI outflows reversed. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except UK and China (flat), global yields closed lower. Elevated growth concerns increased appetite for sovereign securities. Further, stagnated growth in Q2CY22 of Germany, muted retail sales in Japan in Jun’22 and soaring PCE index in the US (fastest since CY05) added to further woes. Even China’s top policy makers hinted at missing the government’s 5.5% growth target in CY22. India’s 10Y yield fell a tad by 1bps (7.32%), taking global cues. It is trading lower at 7.3% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research; Note-mutual fund data pertains to 16 and 17 May 2022

Crude prices rose by 2.7% to US$ 110/bbl amidst speculation that OPEC+ might not boost supply in its upcoming meeting. Gold prices rose by 0.6%, as DXY weakened.

Fig 7 – Commodities

Fears of a global recession surfaced again as PMIs showed moderation in manufacturing activity in Europe, US and China amidst muted demand and high inflation. Germany’s retail sales fell by a record 8.8% in Jun’22 (YoY) exacerbating these concerns. As a result, oil prices declined sharply by 9.1%. Further, expectations of a possible flare up in tensions between US and China ahead of US House of Representative Speaker’s visit to Taiwan kept investors on edge. In India, strong manufacturing PMI data and lower oil prices buoyed investor sentiments.

Global indices ended mixed. While Asian stocks ended largely higher, stocks in US and UK edged down. Disappointing manufacturing PMI data from US, China and Europe impacted investor sentiments. Sensex consolidated its gains and rose by another 0.9%, led by gains in power and auto stocks. However it is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring CNY (lower), other global currencies edged up. DXY declined by another 0.4% in line with a fall in US 10Y yield. Disappointing ISM manufacturing PMI also drove DXY lower. GBP rose by 0.6% ahead of BoE policy meet. INR appreciated by 0.3%, supported by lower oil prices and FPI inflows. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (flat), other global yields closed lower. US 10Y yield fell the most by 8bps, followed by UK (6bps) and Germany (4bps). Muted manufacturing activity from Europe to Asia as seen in the PMI print for Jul’22, drop in retail sales in Germany and falling construction spending in the US added to woes. India’s 10Y yield fell by 8bps to 7.24% as crude prices dropped. Expectations that a new 10Y security may be issued also impacted market sentiments. It is trading at 7.2% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research; Note-mutual fund data pertains to 16 and 17 May 2022

Crude prices fell by 9.1% to US$ 100/bbl as macro prints globally hinted at muted demand. Gold prices also inched up by 0.4% on safe haven demand.

Fig 7 – Commodities

Possibility of an escalation in US-China conflict amidst US House of Representative Speaker’s visit to Taiwan, impacted investor sentiments. Further, three senior Fed officials suggested that the Fed is unlikely to taper from its policy tightening path raising expectations of further rate hikes. Thus, DXY and US 10Y yield rose. On the other hand, RBA while increasing rates by an expected 50bps, hinted that further rate action is not a “pre-set path”. In India, trade deficit surged to a further record- high of US$ 31bn in Jul’22 as exports decelerated while imports increased unabated.

Except Sensex, other global indices ended lower. Investors monitored flaring up of the geopolitical tensions between US and China, after US House representative visited Taiwan. Dow fell by 1.2% with US JOLTS jobs opening dropping to 9-month low, signalling softer labour demand. Amongst other indices, Hang Seng (2.4%) declined the most. Sensex ended flat. It is trading higher today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR and CNY (higher), other global currencies declined. After falling for last four trading sessions, DXY edged up by 0.8% amidst hawkish comments from Fed officials. JPY declined the most by 1.2%, followed by EUR which fell by 0.9%. INR appreciated by 0.4% to a 1-month high supported by FPI inflows. However, it is trading weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. US 10Y yield jumped up sharply by 18bps as hawkish comments from several Fed officials led to expectations that the Fed will continue with its aggressive rate hikes. Concerns over US-China relations too impacted sentiments. 10Y yields in UK (6bps) and Germany (4bps) also inched up. India’s 10Y yield fell by 4bps to a 2-month low of 7.2% awaiting RBI’s policy meet. However, it is trading higher at 7.23% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research; Note-mutual fund data pertains to 16 and 17 May 2022

Oil prices rose by 0.5% ahead of the OPEC+ meet. It is expected that producers may not increase supply amidst concerns over global recession. Gold prices slipped as USD rose.

Fig 7 – Commodities

Strong macro data from the US lifted market sentiments globally. US ISM services PMI edged up to 56.7 in Jul’22 (est. 53.5) from 55.3 in Jun’22 led by a pickup in new orders. Factory orders also rose by 2% in Jun’22 (MoM) beating expectations (+1.1%). Fed officials also reiterated their commitment to bringing inflation back on track, keeping door open for further rate hikes. On the other hand, data from Europe remained concerning as both service PMI (Jul’22) and retail sales (Jun’22) declined. In India, services PMI fell to a 4-month low of 55.5 in Jul’22 from 59.2 in Jun’22.

Except Shanghai Comp, other global indices ended higher led by strong corporate earning reports. US stocks rose the most amidst strong macro data (US ISM services PMI and factory orders). Sensex too rose by 0.4% led by gains in technology stocks. It is trading further higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except EUR (flat), other global currencies declined. DXY rose by 0.2% led by a surprise uptick in US ISM services PMI. JPY fell by 0.5% as Japan’s services PMI fell in Jul’22. INR depreciated by 0.6% led by concerns over elevated trade deficit. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. A host of macro prints such as better US durable goods orders, better exports in Germany and muted services activity in UK, impacted investors’ sentiments. Further, concerns over US-China relations and comments from Fed officials also kept investors on edge. US 10Y yield fell by 4bps, while Germany’s 10Y yield rose by 5bps. India’s 10Y yield rose by 4bps. It is trading lower at 7.22% today, ahead of RBI’s policy meet.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

Cut off yield fell across the board (91-days:-6bps, 182-days: -9bps and 364- days: -10bps) in the current auction of Rs 210bn. Notably, 1Y OIS swap rate also fell, as markets are anticipating cautious move from RBI.

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research; Note-mutual fund data pertains to 16 and 17 May 2022

Crude prices fell by 3.7%, as OPEC+ agreed to increase their output quota from Sep’22. Further, build up in US oil inventories also supported prices.

Fig 7 – Commodities

Bank of England (BoE) raised policy rates by an expected 50bps (biggest rate hike since CY95), as it attempts to tame skyrocketing inflation. It said that CPI inflation is likely to peak at 13% in Oct’22. It further noted that UK is likely to slip into recession in Q4CY22 and emerge from it only in early CY24. Elsewhere in US, labour market conditions softened as jobless claims rose its highest since Nov’21. Oil prices crashed and yield curve inversion in US and UK deepened amidst fears of a looming recession. US jobs report due later today will be keenly awaited. In India, markets await the monetary policy decision of RBI.

Global indices ended mixed. Equity indices in US ended lower led by losses in energy stocks as oil prices crashed to a 6-month low. FTSE ended flat as BoE warned of the possibility of a prolonged recession in UK. Sensex declined by 0.1% as real estate and banking stocks slipped. However, it is trading higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR (lower), other global currencies strengthened. DXY fell by 0.8% as US jobless claims rose last week. EUR rose the most by 0.8% as Germany’s factory orders declined less than expected in Jun’22. GBP rose by 0.1% as BoE raised rate by 50bps. INR depreciated by 0.4% on concerns over widening trade deficit. It is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except China (stable), global yields closed lower amidst tensions surrounding Taiwan. Further recession risk along with central banks’ aggressive approach for price stability also added to woes. Notably in US, inversion between 2Y and 10Y paper was the sharpest since CY00. For UK as well, this similar inversion happened for the first time since CY19. India’s 10Y yield fell sharply by 8bps (7.16%) as declining yields on short term papers and OIS curve indicates a cautious move by RBI. It is trading further lower 7.11% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research; Note-mutual fund data pertains to 16 and 17 May 2022

Crude prices fell by 2.7% to US$ 94/bbl amidst concerns of muted demand. Gold prices rose by 1.5% as recession fears increased demand for safe haven.

Fig 7 – Commodities