Economic Weekly Wrap
05 February 2024 - 09 February 2024

Global market indices reacted differently to different outcomes. On macro front, US non-farm payroll rose at a solid pace, adding 353K in Jan’24 against expectation of 185K. Average hourly earnings remained sticky rising by 0.6% on MoM basis (est.: 0.3%). University of Michigan’s 1 and 5 year inflation expectation index also remained firm. Fed Chair in his recent interview pushed off expectation of rate cut in Mar’24. In other developments, Japan’s services PMI inched up to 53.1 in Jan’24 from 51.5 in Dec’23, led by higher business confidence. The Caixin PMI services data of China remained above the 50 mark at 52.7, albeit a notch down from 52.9 in Dec’23. China’s Securities Regulatory Commission again vowed to prevent market fluctuation. In Japan, BoJ offered to purchase bonds, in an effort to check gains in short term rates. On domestic front, RBI’s policy would be closely monitored.

Global stocks ended mixed. Investors’ focus remained on the changing narrative around Fed rate cuts. US indices ended higher as tech giants reported strong earnings. Stocks in China tumbled despite government’s attempts to stabilize the market. Sensex rose by 0.6%, led by gains in oil and gas stocks. It is trading further higher today, while other Asian stocks are mostly trading lower.

Except INR, other global currencies weakened against the dollar. DXY jumped up by 0.8% as robust jobs report pushed back the possibility of Fed rate cuts in Mar’24. JPY depreciated the most by 1.3%. INR appreciated by 0.1% supported by lower oil prices and optimism over Budget announcements. However, it is trading weaker today, in line with other Asian currencies.

Global yields closed mixed. US 10Y yield rose at the sharpest pace by 14bps as rate cut expectations have been brushed aside for the Mar’24 meeting. The effect was felt in other economies such as UK and Germany. After the Budget phenomenon, India’s 10Y yield stabilised. It is trading higher at 7.09% today, as RBI surprised the market with a 4-day VRRR announcement.

Oil prices fell amidst demand concerns as expectations of Fed rate cut receded.

On macro front, US ISM services PMI data rose to its 4 month high of 53.4 in Jan’24 from 50.4 in Dec’23. New orders and employment indices also showed improvement. Fed officials (Minneapolis Fed President and Chicago Fed President) also spoke of more time to gauge the incoming data before taking any call on rates. CME Fed watch tool is only attaching a 16.5% probability for a rate cut in Mar’24 from 46.2% a week earlier. Thus, US dollar firmed up to its highest since Nov’23. Elsewhere, Central Bank of Australia also went on a path of data dependent cautious pause. The quarterly forecast of RBA show that core inflation will reach the midpoint of its 2-3% target by 2026. Globally, everywhere the rhetoric is not letting the guards down unless the fight against inflation is over. On domestic front, even RBI is expected to walk on the lines of a cautious pause remaining vigil on inflation.

Global stocks ended broadly lower. Prospects of a Fed rate cut were pushed back further following comments from Fed officials amidst strong US macro data. Stock market rout in China continued with the Shanghai Comp moderating due to losses in small cap stocks. Sensex fell by 0.5%, driven by consumer durables stocks. It is trading higher today, while Asian stocks trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR (flat), other global currencies ended higher. DXY fell by 0.4% as US economy is showing signs of slowdown in Q4 and there are expectations of Fed rate cut next year. JPY gained the most, reflecting safe-haven demand. INR ended flat, even as oil prices rose by 4%. It is trading higher today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. Investors are pausing to assess incoming macro data from the US (housing). Yield curve in the US remains inverted and near its trough level, as analysts fear risks of slowdown in Q4. In UK, yields fell as retail sales slumped. India’s 10Y yield was down by 2bps to 7.22%, following global cues. However, it is trading tad higher today at 7.23%.

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 31 Jan and 1st Feb 2024

Oil prices increased amidst escalation in tensions in the Middle-East.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

In the recent trading session, it is reflected that investors have already priced in a late start to the rate cut cycle of Fed. Recent comments of Fed Officials (Cleveland Fed President and Minneapolis Fed President) also spoke of risks to embark too soon on the rate cut cycle, without having a full confidence on evolution of inflation to the targeted level. Thus US 10Y yield softened. Elsewhere, ECB official (Boris Vujcic) spoke of not rushing too soon to the rate cut cycle. On macro front, UK’s BRC’s sales data picked up, indicating some inflationary pressure. In Germany, factory orders inched up by 8.9%, on MoM basis (est.: -0.2%) in Dec’23. On domestic front, RBI’s policy is closely awaited.

Except Japan, stocks elsewhere ended in green. Reports that the Chinese government may unveil further stimulus measures to stabilize the markets, led to a sharp jump in stocks in Hong Kong and China. Investors also monitored comments from Fed and ECB officials to gauge the timing and quantum of rate cuts this year, while also focusing on corporate earnings report. Sensex rose by 0.6%, led by gains in oil and gas and 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 INR (flat), other global currencies appreciated against the dollar. DXY took a breather and fell by 0.2%, as investors continue to assess the timing of Fed rate cuts. GBP and JPY rose by 0.5% each. EUR rose by 0.1% as Germany’s factory orders rose unexpectedly in Dec’23. INR is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except China (higher), global yields closed lower. Buying appetite for sovereign securities increased following comments of major central bank officials which signalled a delayed start to the easing cycle. US and UK’s 10Y yield fell the most by 6bps, each. India’s 10Y yield closed flat. It is trading lower at 7.07% 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 1st and 2nd Feb 2024

Oil prices rose as EIA predicted flat US output, leading to supply concerns.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

On the macro front, China’s inflation data remained worrisome. Producer prices remained in deflation for the 16th straight month falling by 2.5% in Jan’24, on YoY basis. The consumer prices of the region have fallen by 0.8%, which is the weakest pace since Sep’09. Thus in terms of stimulus rather than a piecemeal approach, a holistic response is required on part of the regulators to lift the economy. Elsewhere, Boston Fed President also remained less dovish speaking of more evidence to see inflation reaching the target level. Thus, looking at rate cuts later this year. ECB Board member also spoke of the fact the last mile disinflation may be tough. On domestic front, RBI will be adopting a cautious pause. Any guidance on liquidity would impact both short and long end part of the yield curve.

Global stocks ended mixed. Shanghai Comp rose the most as the government stepped up its defence of the faltering stock market. Elsewhere, stocks in US rose, with the S&P 500 scaling a new record-high, supported by robust earnings reports. On the other hand, FTSE slipped by 0.7% led by losses in blue-chip stocks. Sensex ended flat as gains in real estate stocks were offset by losses in tech stocks. However, it is trading higher today, in line with its Asian peers.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed against the dollar. DXY dipped by 0.2% as focus shifted to US CPI report due next week. GBP rose as rising home prices in UK suggest that rate cuts might be far away. EUR too rose, despite a sharp decline in Germany’s industrial production in Dec’23. INR appreciated by 0.1%. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. Yields in US, UK and Germany were influenced by the fact that a delayed start to the rate cut cycle is reflected from speeches of central bank officials’. China’s 10Y yield fell by 3bps awaiting more stimulus. India’s 10Y yield fell by 2bps. It is trading lower at 7.05% today, ahead of the policy.

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 2nd and 5th Feb 2024

Oil prices increased as US crude inventories rose less than expected.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

In the US, jobless claims data was just shy of expectations, falling to 218k for the week ending 3 Feb 2024 and compared to the previous week’s level of 227k. Thus, a certain degree of tightness in the labor market is still prevalent. Richmond Fed President in his recent speech reiterated to be patient before embarking on the rate cut cycle. ECB Chief Economist also spoke of requiring more evidence of inflation returning to the targeted level and also emphasized not to rush on to the rate cut cycle. BoJ Governor, on the other hand, gave assurance that easy financial conditions would prevail in the region, even post the negative interest rate era. On the domestic front, RBI’s policy remained on expected lines, with no change in policy rates and stance. Inflation forecasts reflect that space for rate cut is available in Q2.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY rose by 0.1% as a drop in US jobless claims reaffirmed the case for pushing back rate cuts. On the other hand, JPY fell sharply as BoJ Deputy Governor stated that the central bank is unlikely to raise interest rates sharply. INR ended flat. It is trading a tad weaker today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (tad lower), global yields closed higher. Risk-on sentiments increased as investors have already priced a delayed response in terms of easing financial conditions by major central banks. Further, a certain degree of resilience in macro data and uncertainty over the inflation trajectory also validate the same. India’s 10Y yield rose by 1 bps and is trading at the same level 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 2nd and 5th Feb 2024

Oil prices rose further amidst escalation in the Middle East conflict.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research