Economic Weekly Wrap
08 January 2024 - 12 January 2024

Global markets are again re-thinking their positions. US non-farm payroll additions came in more than expected at 216k (est.: 175k). This data follows two successive downward revisions of previous months’ prints. The average hourly earnings data also inched up by 0.4% on sequential basis, more than estimated at 0.3%. Thus, traders started repricing and US 10Y yield went up. CME Fed watch tool is now showing a probability of 62.3% for 25bps rate cut in Mar’24, which was pared down from the probability of 73.4%, seen a week earlier. In Eurozone, CPI inched up to 2.9% in Dec’23 from 2.4% in Nov’23, as energy aid in Germany is seen phasing out. ECB also remained cautious of the evolution of interest rate trajectory in its latest commentary. On domestic front, Rabi sowing data remained a cause of concern.

Global stocks ended mixed. Investors monitored US jobs report and ISM nonmanufacturing PMI. Apart from this, a pickup in inflation in Eurozone also weighed on investor sentiments. Based on this, investors have pared back expectations of aggressive rate cuts. Stocks in US rose, while Hang Seng and Shanghai Comp fell. Sensex rose by 0.2%, led by gains in capital goods and technology stocks. It is trading lower today, in line with other Asian indices.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed broadly higher against the dollar. DXY was flat amidst mixed macro data. EUR closed flat following a pickup in inflation in the region. GBP was 0.3% higher, supported by improvement in construction PMI, increase in house prices and pickup in new car sales. INR ended stronger led by equity inflows. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

US 10Y yield rose by 5bps following stronger US non-farm payroll data. Thus, the timing of rate cut cycle remains blurry. The reverberation is felt across yields in UK and Germany. In Japan, 10Y yield moderated a tad as traders delayed the expectation of exit from ultra dovish policy following the economic damages from earthquake. India’s 10Y yield also fell a tad. It is trading at 7.21% 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

Oil prices rose tracking tensions in the Middle East and mixed macro data.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets reacted to a multitude of factors. Fed Governor (Michelle Bowman) spoke of rate cuts if inflation continues to fall towards Fed’s 2% target, to prevent policy from being way too restrictive. Elsewhere, in China, further monetary stimulus may be forthcoming to provide impetus to growth. On macro front, New York Fed 1- year inflation expectations moderated, showing that expectation remaining closely anchored. In Germany, factory orders moderated on a sequential basis, while exports and imports picked pace. In Japan, CPI in Tokyo slowed for the second straight month, in line with BoJ’s view of subsiding import-driven price pressures. On domestic front, Bloomberg Index proposed to include Indian bonds (FAR) to be part of the EM local currency Index from Sep’24, which would support more flows. Thus, India’s 10Y yield could see some downward bias going forward.

Global indices ended mixed. US indices closed in green led by tech stocks and ahead of the inflation print that might offer guidance on the trajectory of Fed path. As per Fed watch tool, investor expect 63.8% (from 88.5%-last week) chance of a cut in Mar'24. On the other hand, Sensex ended in red and was dragged down by losses in banking and metal stocks. It is trading higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research │Note: Nikkei was closed on 8 Jan 2024

Global currencies closed mixed. DXY fell by 0.2% as investors await more data to gauge the trajectory of Fed rates. EUR closed flat despite a pickup in Eurozone’s consumer confidence index. INR ended a tad stronger, tracking lower oil prices. It is trading further stronger today, in line with its Asian peers

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring Japan (flat), other global yields closed lower. US 10Y yield dropped by 2bps as investors awaited inflation data and comments by Fed officials. On the back of the strong data print last week (payrolls report), the prospects of aggressive rate cuts seems muted, as per investors. India’s 10Y yield also fell by 3bps amidst moderation in oil prices. It is trading tad lower 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

Oil prices fell due to fresh demand concerns after price cut by Saudi Arabia.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets remained cautious ahead of release of US CPI inflation data, which is expected to shed some light on the trajectory of Fed fund rate. However, some paring down of expectations is occurring with regard to the pace of normalisation in Fed policy. Even there are talks that rate cut may be pushed beyond Mar’24. On macro front, US Consumer credit data has picked up. In Germany, industrial production has fallen on a MoM basis. In Japan, real cash earnings have fallen at a sharper pace, raising hopes that the exit from ultra-dovish policy by BoJ may be delayed. In Australia, CPI slowed for the 2 nd straight month, raising expectations that RBA may leave policy rate unchanged. In South Korea, unemployment rate rose to its near two year high as elevated rates have started impacting real economy. On domestic front, all eyes remain on IIP and CPI data releases.

Global stocks ended mixed. Focus remained on US inflation report due later this week, which would help ascertain the future course of rates. Dow Jones slipped the most. On the other hand, Nikkei surged to its highest since Mar’90. Sensex ended flat as gains in real estate and power stocks were offset by losses in banking stocks. It is trading lower today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR, other global currencies depreciated. DXY rose by 0.4% ahead of US inflation data. EUR fell by 0.2% tracking a fall in Germany’s industrial production. JPY fell by 0.2% as BOJ’s ultra-dovish policy stance is expected to be maintained, amidst moderating inflation. INR appreciated a tad. However, it is trading weaker today while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. Germany and UK’s 10Y yield rose by 5bps and 1bps each amidst reports of higher supply in the market in the coming days. US, Japan and China’s 10Y yield has fallen by 2bps each. Some delayed start of US rate cut cycle is now the undertone of the market. India’s 10Y yield also fell a tad. It is trading at the same level today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. Germany and UK’s 10Y yield rose by 5bps and 1bps each amidst reports of higher supply in the market in the coming days. US, Japan and China’s 10Y yield has fallen by 2bps each. Some delayed start of US rate cut cycle is now the undertone of the market. India’s 10Y yield also fell a tad. It 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

Oil prices inched up amidst reports of contraction in US stockpiles.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Amongst major equity indices, rally in Nikkei continued and it headed towards a fresh 3 decade high. Muted wage data of the region further supported the view that normalisation in its policy is likely to be delayed. In the US, New York Fed President has spoken of current policy being sufficiently restrictive to bring down inflation. However, he cautioned about more evidence for the same. Traders globally have dialled back their previous expectation of a faster pace of rate cut. The upcoming CPI data in the US will provide fresh cues, where CPI and core CPI is expected to rise sequentially by 0.2 and 0.3%, respectively. Elsewhere, ECB policy makers hinted at economic outlook being weak. Thus even ECB’s cycle might be delayed. On domestic front, short end yields as seen in Tbill auction inched up slightly based on liquidity conditions, while buying support for long part of the curve remained

Global markets ended mixed. Stocks in US advanced as investors await US CPI and PPI report. Focus also remained on the start of earnings season. Nikkei continued its rally and surged by 2% to a 34-year high. Shanghai Comp and Hang Seng however, fell. Sensex rose by 0.4% led by gains in consumer durables stocks. It is trading further higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed as focus remained on US inflation data. DXY was 0.2% lower. On the other hand, EUR was up by 0.4% as France’s industrial production rose more than expected in Nov’23. JPY depreciated by 0.9% amidst a further decline in real wages. INR got support from lower oil prices. 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. 10Y yields in UK, Germany and US inched up ahead of CPI data release in the US. The rise in UK’s 10Y yield was the most despite BoE Governor hinting at lower mortgage rates in the near term. Japan’s 10Y yield fell a tad post muted wage data. India’s 10Y yield also fell by 1bps. It is trading at 7.19% 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 5th and 8th Jan

Oil prices fell by 1% amidst a surprise increase in US stockpiles

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets tracked a host of macro and geopolitical developments. In the US, CPI data rose more than anticipated by 0.3%, on MoM basis (est.: 0.2%). Core CPI remained firm at 0.3%. The sequential inching up of CPI is attributable to rise in shelter and energy prices. US jobless claims rose less than expected by 202K (est.:210k), signalling some tightness. Thus uncertainty continue to reign in over the timing of normalisation of Fed policy. Fed officials (Thomas Barkin and Loretta Mester) also spoke of requiring further clarity. In China, CPI fell for the 3rd straight month and PPI continued to remain in deflation, reigniting concerns of weaker demand. Geopolitical turmoil got flared up with US and allies launching airstrikes in Yemen. Crude prices reacted to the same. On domestic front, IIP and CPI numbers are awaited. Any CPI print on the downside will further comfort domestic yields.

Except FTSE and S&P 500, other global stocks ended in green, with Asian stocks leading the rally. Investors assessed the US CPI print which was higher than expectations. Fed’s Mester however, stated that a rate cut in Mar’24 would be too early. This has led to uncertainty over future Fed rates. Sensex rose by 0.1%, led by gains in auto and oil and gas stocks. It is trading further higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed broadly higher against the dollar. DXY fell by 0.1% despite a higher than expected inflation reading. JPY gained the most and rose by 0.3%. INR appreciated a tad and inched towards a 1-month high. However, it is trading weaker today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. US10Y yield fell by 6bps despite slightly discomforting macro prints wrt. inflation and labour market conditions. However, yields of other economies reacted to the same (UK, Germany). ECB President also hinted at cautious approach with regard to battling inflation. India’s 10Y yield fell by 2bps. It is trading lower at 7.16% 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

Oil prices rose by 0.8% as tensions in Middle-East escalated.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research