Economic Weekly Wrap
01 January 2024 - 05 January 2024

The Fed policy meet in Dec’23 has made a crucial shift with Fed Chair signalling a dovish pivot in CY24. Investors anticipate a 75bps rate cut through the year on the back of moderation in inflation. Against this backdrop, dollar is expected to weaken further, it had already declined by 2% for CY23. Oil prices have fallen by ~10%, steepest decline since CY20 (-22%) owing to muted demand. As global economic activity is expected to weaken further in H1CY24, investors are hoping for rate cuts by other central banks (ECB and BoE) also. In Asia, China’s official PMI data reflects that contraction in manufacturing activity deepened in Dec’23, while nonmanufacturing activity improved. Domestically, India’s eight core index moderated to 7.8% in Nov’23 from 12.5% in Oct’23, with contraction in crude oil output.

Global indices ended mixed. US indices closed the last trading day of the year on lower note. Sensex too ended the day in red led by losses in oil & gas and banking stocks. In CY23, Sensex ended CY23 18.7% higher, second to S&P 500 (24.2%), as other major indices end the year with slower growth . However, it is trading lower today.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed. DXY inched up by 0.1% but is expected to weaken amidst anticipation of aggressive rate cuts by Fed. JPY and CNY gained the most. Investors hope BoJ to exit the ultra-loose monetary policy in CY24, though cues from BoJ itself are awaited. INR ended flat, after falling by 0.6% in CY23. It is trading higher today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

 Barring China and India, other global yields closed higher. Tracking gains in US treasury yields, Germany and UK’s 10Y yields also climbed higher by 8bps and 4bps respectively. India’s 10Y yield declined a tad by 1bps, and during CY23, it was down by 17bps, even as US 10Y yield closed CY23 at similar levels as last year (+0.4bps). India’s 10Y yield is trading slightly higher 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 as of 22 Dec 2023 and 26 Dec 2023

Oil prices dropped further, amidst easing supply concerns (Red Sea route).

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets remained closed on New Year’s day, but Asian markets have seen a mixed opening today as China’s official manufacturing PMI data shows deepening contraction in Dec’23. However, Caixin China manufacturing PMI, which mainly covers small and medium firms in its survey, showed that activity held ground in Dec’23 (50.8 versus 50.7 in Nov’23). Although, respondents still believe that tighter consumer budgets and sluggish global demand remains a key worry. Separately in Australia, manufacturing PMI suggests that activity fell at the sharpest rate since May’20, as the index dropped to 47.6 in Dec’23 from 47.7 in Nov’23. Deteriorating demand conditions remains a key drag, which in turn has led to job losses and increased stocks. This week, markets will follow India’s 1st AE of FY24 GDP, PMIs of other major economies and also await FOMC minutes, non-farm payroll data for further guidance.

Asian indices started the year on a mixed note with the official factory activity declining further and remaining in contraction in Dec’23 (49 from 49.4 in Nov’23). Sensex ended flat. Oil & gas and real estate stocks registered some gains. However, it is trading lower today, while Asian markets are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research| Note: Except India, all other markets were closed on 1.1.24

Global currencies closed mixed. Investors expect DXY to remain steady even as they awaits further cues on interest rate outlook from Fed and other economic data. Investors have priced in 86% chance of rate cut beginning from Mar’24. INR ended flat. However, it is trading weaker today, while other Asian currencies are trading mixed

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research| Note: Markets in China were closed on 1.1.24

Apart from India, all other markets remained closed yesterday. India’s 10Y yield rose by 2bps owing to supply side pressures. Higher than expected borrowing announcement by states played on investor sentiments. However, it is trading flat at 7.20% today, awaiting global cues

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research| Note: Except India, all other markets were closed on 1.1.24

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research| Note: Except India, all other markets were closed on 1.1.24

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research

Oil prices slipped. However, they opened 1% higher today, following military clashes in the Red Sea region and hopes of government stimulus in China.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research| Note: All markets were closed on 1.1.24

Global manufacturing activity remains under duress, as contraction was reported in 23 out of 29 surveyed countries by Markit PMI. Global manufacturing PMI fell to 49 in Dec’23 from 49.3 in Nov’23. Downturn deepened in US (47.9 versus 49.4) and UK (46.2 versus 47.2). In Eurozone, pace of contraction eased a tad (44.4 versus 44.2), but the the biggest economies (Germany and France) continued to report faster pace of deteriorating conditions. In Asia, conditions seem to be slightly better. Singapore’s Q4CY23 GDP rose by 2.8%, following 1% rise in Q3, mainly on account of gains made in manufacturing and construction sector. Domestically, RBI has issued new rules regarding declaration of dividends by banks. The proposed rules will be effective from FY25. It was suggested that net NPA ratio for a financial year for which dividend is announced, should be lower than 6%.

Barring Dow Jones, other global indices ended lower. Investors await key payrolls report scheduled later this week, in order to gauge the timing of Fed rate cut. Fed is expected to hold rates in Jan’24 and start the rate cut cycle in Mar’24. Sensex ended lower and was dragged down by losses in cap goods and auto stocks. It is trading lower today in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research| Note: Except India, all other markets were closed on 1.1.24; markets in Japan remain closed

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research| Note: Markets in China were closed on 1.1.24

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research| Note: Except India, all other markets were closed on 1.1.24; markets in Japan remain closed

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research| Note: Except India, all other markets were closed on 1.1.24

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research| Note: Mutual fund data as of 28 Dec 2023 and 29 Dec 2023

Oil prices started the year on a weak footing, amidst stronger US$.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research| Note: Al markets were closed on 1.1.24

FOMC minutes of the Dec’23 meeting revealed, that while the members have acknowledged fading inflationary risks, they are now also concerned about of the impact of restrictive monetary policy on growth and employment. Fed Chair is of the view that US economy might skirt off recession, while some other members pointed out that recession is impending. Concerns were also raised that gradual cooling off in the labour market may turn into a “more abrupt downward shift conditions”. The JOLTS survey shows that job opening in Nov’23 fell by 62k to 8.79mn from 8.8mn, dropping to lowest levels since Mar’21. US ISM manufacturing PMI also signals deteriorating conditions in Dec’23 (46.7, unchanged from last month). In Japan as well, manufacturing PMI indicates deepening contraction (47.9 versus 48.3).

Barring Shanghai comp, other global indices ended lower. Investors closely monitored Fed minutes which reflected some uncertainty over the pace of rate cuts, than was initially anticipated. European indices also ended lower awaiting more cues. Sensex ended in red and was dragged down by losses in metal stocks. However, it is trading higher today while Asian indices are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research| Note: Markets in Japan remain closed

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research| Note: Markets in Japan remain closed

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 as of 29 Dec 2023 and 1 Jan 2024

Oil prices jumped, following supply side tensions (Libya and Israel-Gaza war)

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Better than expected labour market data from the US has pushed global yields back up. The yield gap between short-term and long-term US securities narrowed. Initial jobless claims in the US fell by 18k to 202k (est.: 215k) for the week ending 30 Dec’23. Even private payrolls data (ADP) indicate that employment went up by 164k (est.: 115k) in Dec’23 from 101k in Nov’23—posting fastest increase since Aug’23. Markit PMI data shows that services sector activity continued to expand in Dec’23 at faster pace in the US and UK, while it remained in contraction in Eurozone (led by France and Germany). Solid economic data from the US has raised uncertainty around timing of Fed’s rate cut, with CME Fed Watch Tool suggesting that chances of no rate cut in Mar’24 have gone up to 35% from 13% a week ago. Nearly 60% chances are still priced in for 25bps rate cut.

Global indices ended mixed. Investors monitored US ADP jobs report which came in stronger than expected (companies added 1,64,000 jobs in Dec’23) Additionally the weekly jobless claims data was also lower than anticipated, signalling labour market remains tight. Sensex ended higher led by sharp gains in real estate stocks. It is trading higher today in line with other Asian indices.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research| Note: Markets in Japan were closed until 3 Jan 2024

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research| Note: Markets in Japan were closed until 3 Jan 2024

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 as of 1 Jan 2024 and 2 Jan 2024

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research