Economics Weekly Wrap
08th - 12th August 2022

Better than expected macro prints in US, Europe and Asia boosted investor sentiments (yields and crude closed higher). Non-farm payroll data in US showed that 528k jobs were added in Jul’22 compared with 398k in Jun’22 and est.: 250k, thus assuring the investors that the US economy is not slowing down as yet and Fed might continue to hike rates aggressively. Further, industrial production (MoM) in Germany (0.4% versus -0.3%) and France (1.4% versus -0.3%) was also better than anticipated. Inflation in Thailand cooled in Jul’22 (7.61% versus est.: 8%), and Indonesia’s Q2CY22 GDP rose by 5.4% versus est.: 5.2% and 5% in Q1. Domestically, RBI raised rates by 50bps to 5.4% and hinted at further normalisation&of policy, in line with global central banks.

Barring S&P 500 and FTSE, other global indices ended higher, led by strong US jobs report, which eased fears of slowdown in US economy. Investors might also assess this show of strength with Fed aggressively hiking rates. Shanghai Comp (1.2%) gained the most followed by Nikkei (0.9%). Sensex (0.2%) too ended in green led by gains in technology and banking stocks. It is trading further higher today, while other Asian stocks are trading lower.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR, other global currencies weakened. DXY strengthened by 0.9% as US jobs growth accelerated more than anticipated in Jul'22 (largest gain since Feb'22). GBP was down by 0.7% after BoE raised rates to combat inflation and warned of long recession. Euro too dropped by 0.6%. INR rose by 0.3%. However, it is trading lower today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (lower), global yields closed sharply higher, as better than expected US jobs print suggest that Fed might continue with aggressive rate hike in Sep’22 as well. India’s 10Y yield too rose significantly by 14bps (7.30%) following RBI’s front-loading of rate hike (+50bps). It is trading further higher at 7.35% 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 oil prices edged upwards by 0.8% to US$ 95/bbl on the back of strong data print from US and relatively tighter supply conditions (drop in US oil rig counts). Gold prices dropped by 0.9% as DXY strengthened.

Fig 7 – Commodities

Investors cautiously await US CPI print due later in the day today, which is expected to have eased to 8.7% in Jul’22 from 9.1% in Jun’22. This will also give cues on Fed’s future rate hike actions. Productivity data in US showed that output per worker fell further by 4.6% in Jul’22, following a decline of 7.4% in Jun’22, which led to 10.8% jump in unit labour cost in Jul’22 (est.: 9.6%), compared with 12.6% increase in cost the previous month. Elsewhere in China, producer prices eased with PPI moderating to 4.2% (est.: 4.8%) in Jul’22 from 6.1% in Jun’22. However, retail inflation picked up slightly with CPI at 2.7% versus 2.5% last month, led by higher food prices.

Barring FTSE and Shanghai Comp (higher), global stocks edged lower as recession fear impacted investor sentiments. Nikkei fell the most by 0.9% amidst weak corporate earnings. US stocks also ended lower as cautiousness prevailed ahead of the release of CPI data, for cues on interest rate trajectory. Sensex is trading lower today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed with JPY (0.1%) falling, EUR (0.2%) gaining and GBP and CNY closing flat. DXY fell by 0.1%, dragged by dip in equity markets and as investors await US CPI print. Today, INR is trading higher, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (lower), global yields closed higher. US, UK and Germany’s 10Y yield rose by 2bps each. Separately, Fed official, James Bullard remarked that interest rates might be ‘higher for longer’ to control inflation. The 2Y US paper exceeded 10Y by 50bps, deepest inversion since CY00 and also a signal of recession. India’s 10Y yield is trading at 7.34% 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 oil prices fell by 0.4% to US$ 96/bbl, as there was unexpected rise in US crude stocks, which could indicate weak demand. Gold prices inched up (0.3%) as appetite for US$ weakened.

Fig 7 – Commodities

US CPI rose by 8.5% in Jul’22 versus est.: 8.7% and 9.1% in Jun’22, supported by ~20% decline in gasoline prices. Equity markets cheered, bond yields cooled and oil prices inched up on hopes of revived demand. However on a MoM basis, inflation remained unchanged from Jun’22 at 1.3% in Jul’22 (est.: 0.2%). Investors are now expecting inflation to have peaked and Fed to slowdown the pace of rate hikes in the coming months. However, some officials like Minneapolis Fed Bank President are still of the view rate hike should continue at the current pace to bring inflation lower.

Global indices ended mixed as investors monitored varied global data print. US indices ended in green with inflation rising at a softer pace. Hang Seng (2%) dropped the most amongst other indices, followed by Nikkei (0.6%). Sensex (0.1%) too ended in red led by losses in real estate and technology stocks. However, it is trading higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended higher against the dollar. DXY slipped by 1.1% on the back of cooler than anticipated US inflation print, easing concerns and raising hopes of less aggressive rate hike by Fed. GBP rose by 1.2% buoyed by UK politics. INR appreciated by 0.2%. It is trading stronger today while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed with 10Y yield in US and China closing flat and yields in India, Germany and UK declining. Weaker than expected US CPI print has increased hopes of slowdown in the pace of rate hikes by Fed. However, Minneapolis Fed Bank President Neel Kashkari still believes that Fed should continue to hike rate at the current pace to reach 3.9% by end of CY22. Following global cues, India’s 10Y yield was down to 7.31% and is trading at 7.28% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

At RBI’s latest T-bill auction, rates moved up slightly. Compared with last week, there was 4bps increase in 91-day rate and 7bps increase in 182-day rate.

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 oil prices rose by 1.1% to US$ 97/bbl, following a pickup in gasoline demand in the US and weaker than expected US CPI print.

Fig 7 – Commodities

Following the dip in US CPI, recent data shows that US PPI also cooled off in Jul’22. It fell by 0.5% in Jul’22 (est.: +0.2%) after rising by 1% in Jun’22. This is the first monthly decline since Apr’20 and has led investors to believe that inflation might have peaked in the US. It has also lent support to renewed hopes of improved oil demand. IEA has recently increased its oil demand forecast to 2.1mn bpd as it expects gas-to-oil switch in view of high gas prices. On the contrary, OPEC expects oil demand to fall to 3.1mn bpd if global inflation remains elevated. Fed is also expected to remain cautious and continue to hike rates until CPI fall in the targeted range.

Global indices ended mixed. Investors monitored US inflation print, post CPI even the PPI print came in lower for Jul'22 confirming softening of prices. However, investors expect the Fed to continue with monetary tightening, until the inflationary pressures recede. Sensex (0.9%) ended in green led by strong gains in banking and consumer durable stocks. It is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring Euro, other global currencies ended lower. DXY remained under pressure and declined by 0.1% after investors expected inflation to have peaked but remains sticky enough for Fed to continue with tightening. GBP dropped by 0.1% ahead of the UK GDP print. INR depreciated by 0.2% as oil prices surged. It opened weaker today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring India and China (lower), other global yields closed higher. US and UK 10Y yields were up by 11bps each as investors expect Fed to continue tighten monetary policy until inflation falls close to the targeted range. US PPI print suggests that inflation might have peaked now. India’s 10Y yield was down by 4bps, awaiting CPI print for Jul’22. However, it is trading higher at 7.30% 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 oil prices rose by 2.3% as softening of US CPI has boosted hopes of improved demand. Gold prices fell a tad by 0.1%, as investors analyse statements of Fed officials to predict Fed’s rate hike trajectory.

Fig 7 – Commodities