Economic Weekly Wrap
03 October 2023 - 06 October 2023

US PCE deflator closely tracked by Fed to gauge underlying price pressure rose at a sharper pace by 0.4% in Aug’23 compared to 0.2% in Jul’23, on MoM basis. Even University of Michigan’s both 1 Year and 5-10 Year inflation expectations remained sticky. US ISM manufacturing print also inched up to 49 in Sep’23 compared to 47.6 seen in Aug’23. More importantly, the employment index rose to 51.2 compared to 48.5 in Aug’23, affirming tighter labour market conditions. This all led expectations of higher for longer rates by Fed. Even Fed governor Michelle Bowman also remained hawkish on the back of uncertainty reigning inflation. On domestic front, slew of macro data releases pointed to resilience of Indian economy. GST collections rose 10% crossing the Rs 1.6 lakh crore mark, core sector output rose by 12.1% in Aug’23 from 8.4% in Jul’23. In the current week, all eyes will be on movement of crude oil and RBI’s policy.

Global indices ended mixed as investors braced for the possibility of higher US rates. US stocks ended mixed after comments from Fed Chair. FTSE fell the most by 1.3%, as manufacturing PMI remained well below the expansion zone. Sensex is trading lower today amidst adverse global cues, with all sectors in red. Asian markets are also trading weaker.

DXY rose further by 0.7% as continued strength in US economy has increased the likelihood of higher US rates. Both EUR and GBP depreciated, as manufacturing activity deteriorated further. JPY inched closer to 150/$, raising possibility of intervention. INR is trading weaker today, in line with Asian peers.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

DXY rose further by 0.7% as continued strength in US economy has increased the likelihood of higher US rates. Both EUR and GBP depreciated, as manufacturing activity deteriorated further. JPY inched closer to 150/$, raising possibility of intervention. INR is trading weaker today, in line with Asian peers.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except China (lower), global yields closed higher. UK’s 10Y yield rose the most by 13bps followed by US (+11bps) and Germany’s (+8bps). This was after US legislators were able to come to a short term agreement on fiscal prudence. Apart from this, macro data in the US also signalled tighter monetary policy. India’s 10Y yield is trading at 7.27% today, taking global cues.

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, Mutual fund data as of 11 and 12 Sep

Global commodity prices fell sharply amidst a sharp uptick in US dollar.

Fig 7 – Commodities

Sell off in the bond market continued with US 10Y yield rising by 12bps to its highest level since 2007. Markets remained jittery over tighter liquidity conditions which exacerbated the selling pressure. Even Fed official Raphael Bostic reiterated the need for tighter policy. Equity markets also took the beating. Elsewhere, Yen’s movement was keenly watched after Japan’s Finance Minister spoke of closely monitoring the currency market. In terms of macro data releases, US JOLTS job opening rose more than expected to 9610k (est.: 8815k). UK’s BRC shop Index showed some degree of moderation to 6.2% in Sep’23 from 6.9% in Aug’23, providing slight respite on inflation. Japan’s services activity slightly rose above last month’s level to 53.8. On domestic front, World Bank in its recent update said that amidst global uncertainty Indian economy has maintained its resilience and is expected to grow by 6.3% in the current FY.

Global stocks witnessed a broad-based sell-off as higher than expected job openings in US, supported the narrative of higher for longer rates by the Fed. Stocks in Hong Kong, Japan and US fell sharply. Sensex too declined by 0.5%, in line with global cues. Oil and gas and auto stocks fell the most. It is trading further lower today, in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

DXY advanced to an 11-month high supported by better than expected labour market data. Most global currencies were lower. INR tethered near its record low led by FPI outflows. JPY appreciated by 0.6% amidst chatter of intervention. INR is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan and China (a tad lower), global yields closed higher. US 10Y yield rose the most by 12bps. This was followed by tighter labour market data, thus raising hopes of higher for longer rates to prevent overheating. Germany’s 10Y yield also rose by 5bps tracking comments from ECB’s Vice President. India’s 10Y yield rose by 2bps taking global cues. It is trading at 7.25% 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, Mutual fund data as of 11 and 12 Sep

Oil prices edged up by 0.2% ahead of OPEC+ meeting.

Fig 7 – Commodities

Some correction was visible in global equity and bond markets led by softening macros worldwide. US 10Y yield closed 6bps lower compared to its last session. This was supported by weaker than expected ADP employment change data which came in at 89K (est.: 150K). Durable goods orders came a tad less than expected at 0.1% (est.: 0.2%). Even ISM services index was lower at 53.6 compared to last month’s level of 54.5. Elsewhere even in the Eurozone, the Composite PMI remained well below the 50 mark at 47.2. Deteriorating demand conditions both in the manufacturing and services sector resulted in the same. Retail sales of the region also fell at a sharper pace than anticipated by 1.2% (est.:-0.5%). On domestic front, all eyes are on RBI policy decision where a hawkish pause is expected.

Global indices were mixed after a slew of macro data releases from US. JP Morgan’s global services PMI index moderated to an 8-month low in Sep’23, amidst a broad based slowdown in services activity across the globe. While equity markets in US rose, stocks in Asia were lower, led by Japan. Sensex fell by 0.4%, amidst sharp losses in metal and real estate stocks. However, it is trading higher today, in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

DXY retreated after lower than expected job additions (ADP) and a moderation in ISM non-manufacturing PMI. As a result, EUR gained against the dollar despite weak macro data (retail sales and services PMI). JPY and INR were a tad weaker. Asian currencies, including INR are trading stronger today.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (higher) and India (stable), global yields closed lower. US 10Y yield fell by 6bps monitoring some moderation in private payroll data. Germany’s 10Y yield fell by 5bps as composite PMI data remained below the 50-expansion mark. Japan’s 10Y yield rose by 4bps watching the movement in yen. India’s 10Y yield closed stable at 7.24%. It is trading at 7.25% 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, Mutual fund data as of 11 and 12 Sep

Oil prices slipped amidst concerns over demand outlook after weak PMI data.

Fig 7 – Commodities

Correction in global yields continued. In the US, jobless claims data came in less than expected at 207K (est.: 210K). However, all eyes are on the payroll number which is expected to soften a bit to 170K compared to previous month’s level of 187K. Whether it will be on expected lines or a discordant narrative will be seen, will hold the cue for movement of major asset classes. Elsewhere, in Germany both exports and imports fell more than expected by 1.2% and 0.4% respectively in Aug’23, on sequential basis. IMF’s Managing Director spoke of higher chances of avoiding recession and pitched in for soft landing. Further, inflation in some countries is expected to be above the target until 2025. On domestic front, RBI’s policy decision and narrative on liquidity will guide markets.

Except US, global stocks ended higher. Markets found comfort from lower oil prices and a reversal in global bond markets sell-off. Nikkei rose the most by 1.8%. US stocks were lower ahead of the key jobs report. Sensex snapped its 2-day losing streak and ended higher by 0.6%. Capital goods and consumer durables stocks rose the most. It is trading further higher today, in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended stronger against the dollar. DXY fell by 0.4% as investors focussed on US non-farm payrolls data due later today. GBP gained the most by 0.5%, followed by a 0.4% gain in both EUR and JPY. INR ended flat. It is trading stronger today in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields broadly closed lower. US 10Y yield fell a tad by 1bps tracking comments from Fed official who spoke of not raising rates at the current juncture, as the situation itself is much more restrictive in action. Germany’s 10Y yield fell by 4bps as ECB policymaker hinted that last month’s hike was the last in the cycle. India’s 10Y yield fell by 2bps at 7.22%. It is trading at 7.26% 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, Mutual fund data as of 11 and 12 Sep

Oil prices declined by another 2% weighed down by demand concerns.

Fig 7 – Commodities