Economic Weekly Wrap
08 July 2024 - 05 July 2024

US jobs report indicated a softening momentum in the labour market, bolstering the case for a rate cut in Sep’24. While non-farm payrolls increased more than expected by 206,000 in Jun’24 (est. 190,000), data for both Apr’24 and May’24 was revised sharply lower. Unemployment rate edged up to its highest since Oct’21 to 4.1% in Jun’24 from 4%. Growth in average hourly earnings slowed to 0.3% from 0.4% in May’24. Elsewhere in Japan, real wages declined for the 26th straight month by 1.4% in May’24. In Europe, focus remained on political developments. In UK, the new Prime Minister faces multiple challenges amid faltering growth in the country. In France, results of the second-round elections solidified expectations of a hung parliament. This week, focus remains on inflation reports from China, Germany, US and India, along with central bank meetings in New Zealand and South Korea.

Global indices ended mixed. Stocks in US were supported by softening labour market conditions raising hopes of a rate cut in Sep’24 (CME Fed watch probability at 72% vs 57.9% last week). Stocks in UK were lower, as investors kept a close eye on election results where Labour Party won a resounding majority. Asian stocks traded cautiously with Hang Seng losing the most. Sensex was a tad down. It is trading lower today in line with its Asian peers.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended higher against the dollar. DXY declined as recent data has led to expectations of a Sep’24 rate cut. GBP appreciated the most after a landslide victory for the Labour party in UK elections. INR closed broadly unchanged. It is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Except China (higher), global yields closed lower. US 10Y yield fell the most supported by steep downward revisions in payroll numbers. Yields in Germany and UK also felt the impact of the same. Risk off sentiment surrounding evolving political landscape also led to increased demand for sovereign securities. India’s 10Y yield fell a tad, eyeing auction results. 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 | Note: Mutual Fund data as of 2 Jul and 3 Jul 2024

Oil prices eased amidst reports of a ceasefire between Israel and Hamas.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Fed Chair reiterated that US inflation is on track to return to the Fed’s target range but shied away from committing to a widely expected rate cut in Sep’24. This comes on ahead of CPI data which is likely to show a further moderation to 3.1% in Jun’24 from 3.3% in Jul’24 (YoY). Traders are now pricing in two possible rate cuts by the Fed in 2024, with the first expected in Sep’24 (70% probability as per CME FedWatch Tool) and another in Dec’24 (probability at 46%). Separately, Bank of England’s Chief Economist flagged the continued stubbornness in inflation and increase in wage growth as risks to policy easing. As a result, investors have pared back expectations of a rate cut by the BoE in Aug’24. In Japan, core machinery orders declined by 3.2% (est. 0.9% drop), following a decline of 2.9% in Apr’24. The data complicates BoJ’s decision to raise rates amid faltering growth and increasing price pressures.

Global indices ended mixed. Investors remained cautious monitoring comments of key central bank officials. Stocks in China fell the most amid worries over persisting pressure in pricing power. In US, stocks rose led by hopes that the Fed will start its easing cycle in Sep’24. Sensex fell by 0.5%, led by metal and auto stocks. It is trading higher today, while Asian stocks are trading mixed.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY declined by 0.1% as investors have raised bets of two rate cuts by Fed this year. GBP rose by 0.5% tracking comments from a key BoE official. JPY depreciated further to its weakest since Dec’86. INR fell a tad. However, it is trading stronger today, in line with other Asian peers.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields closed lower. In Germany, 10Y yield fell the most by 5bps led by political uncertainty in France. In UK, 10Y yield fell by 3bps even as BoE member flagged risks of underlying inflation. US 10Y yield fell a tad following comments of Fed official who spoke of US data reaffirming soft landing. India’s 10Y yield inched down marginally and is trading flat 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 4 Jul and 5 Jul 2024

Oil prices rose as OPEC upgraded its global growth forecast.

Fig 7 – Commodities

US CPI report cemented the case for a Fed rate cut in Sep’24. On a MoM basis, CPI inflation in the US declined by 0.1% (est. +0.1%), marking its first drop since May’20. Core CPI also eased to 0.1% from 0.2% in May’24. The drop in inflation was welcomed by a voting member of the FOMC who termed it “excellent”. Jobless claims declined more than expected due to seasonal factors. In Germany, CPI inflation in Jun’24 was confirmed at 2.2%, moderating from 2.4%. UK’s GDP posted a solid 0.4% growth in May’24 (0% in Apr’24), providing a significant boost to the new government. Separately, China’s exports increased by 8.6% in Jun’24 (est. 8%). However, domestic demand remained subdued as reflected in the unexpected decline in imports (-2.3% vs. est. +2.8%). In India, CPI inflation is likely to inch up to 4.9% in Jun’24 from 4.75%, as food prices remain elevated. IIP growth is expected to improve to 6% from 5% in Apr’24 (BoB estimate).

Except S&P 500 and Indian stocks, global indices ended higher. Investor sentiments were bolstered by encouraging CPI print in the US which strengthened case for rate cut. Hang Seng has risen the most followed by Shanghai Comp. Moderation of S&P 500 was led by technology stocks. Sensex closed flat. It is trading higher today, while Asian stocks are trading mixed.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

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 8 Jul and 9 Jul 2024

Oil prices edged up amidst falling US inventories.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research