Economic Weekly Wrap
12 December 2022 - 16 December 2022

Data showed that while PPI inflation in the US moderated to 0.3%in Nov’22 (same as Oct’22), it increased more than market estimates of 0.2%, on a MoM basis. On the other hand, University of Michigan’s survey showed that consumer sentiment picked up in Dec’22 and inflation expectations eased markedly. This raised the possibility that the Fed may keep rates high for a longer period of time and hence the Fed meet takes the centre stage this week. BoE and ECB also meet this week and are expected to raise rates by 50bps respectively. Other major data releases such as CPI data of US, Germany, UK and India as well as US retail sales will also be closely watched.

Global stocks ended mixed. Markets in Europe and China closed higher, while those in US and India ended lower. While uncertainties remain around how much longer US Fed will have to keep rates high, on the other hand, markets in Europe and China cheered the news of relaxation of Covid-19 restrictions in China. Sensex fell by 0.6%, dragged by tech, realty and metal stocks. It is trading further lower today, in line with other Asian indices.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except EUR, other global currencies edged up against the dollar. DXY closed flat amidst mixed US data (PPI and consumer sentiment index). EUR fell by 0.2% ahead of ECB meet. GBP rose by 0.2% as government announced new measures aimed towards overhauling its financial sector. INR appreciated by 0.2% amidst lower oil prices. However it is trading weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring Japan and China (flat), other global bond yields ended higher. Following higher than estimated data for US PPI in Nov’22, yields in US and Europe rose the most. Further as consumer demand in the US (Michigan sentiment index) remains steady, investors also expect rates to remain high for a longer period than earlier anticipated. India’s 10Y yield rose by 1bps and is trading further higher at 7.32% today, following 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 │Note: Mutual funds data as of 25 Nov 2022 and 28 Nov 2022

Crude oil prices fell further by 0.1% due to demand concerns amidst possibility of a marked growth slowdown in the three major global economies.

Fig 7 – Commodities

remained rather subdued awaiting US inflation report and Fed policy outcome. US CPI due today, is likely to show that inflation moderated to 7.3% in Nov’22 from 7.7% in Oct’22 on a YoY basis. The data will be crucial as the Fed delivers its decision on Wednesday, and investors are likely to look for further cues on Fed’s future rate path. UK”s GDP growth picked up to 0.5% in Oct’22 after declining by 0.6% in Sep’22. Oil markets were buoyed by reopening in China, even as concerns remain over a potential spike in Covid-19 cases. In India, CPI inflation eased more than expected to 5.9% in Nov’22 from 6.8% in Oct’22. On the other hand, IIP growth slipped sharply by 4% in Oct’22, led by a dip in manufacturing.

Barring the US (higher), stock indices elsewhere closed lower. Investors are awaiting US CPI data, due for release later today, and Fed’s outlook for CY23. ECB and BoE are also expected to raise rates by 50bps later in the week. In India, Sensex fell by 0.1%, dragged down by consumer durables and tech stocks. However, it is trading higher today, in line with other Asian indices.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY rose by 0.3% as investors await US CPI data and Fed policy. GBP rose by 0.1% as GDP growth bounced back in Oct’22. CNY fell by 0.3% amidst concerns over a surge in Covid-19 cases as restrictions are eased. INR depreciated by 0.3% as oil prices rose. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global bond yields closed mixed. While 10Y yields inched up in US and Europe, they remained flat in Asia. US 10Y yield rose the most (3bps), followed by UK (2bps). Investors keenly wait indication from Fed whether it will be able to begin rate cuts from H2CY23. India’s 10Y yield remained unchanged. However, it is trading lower at 7.28% today, tracking CPI data, which came in lower than expected for Nov’22.

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 funds data as of 25 Nov 2022 and 28 Nov 2022

Crude oil prices rebounded and surged by 2.5% amidst supply concerns due to outage in a key US-Canada pipeline, as well as threats of a production cut by Russia. Reopening in China also buoyed hopes of a demand recovery.

Fig 7 – Commodities

Markets cheered softer than expected inflation print from the US, which suggests that the terminal Fed rate may not be as high as expected earlier. US CPI eased to 7.1% in Nov’22, against expectations of 7.3% increase and from 7.7% in Oct’22. This marked the slowest pace of price increase since Dec’21 and was led by a drop in gasoline prices and healthcare. With this, investors’ expectations of Fed’s terminal rate has been scaled back to 4.8% versus 5.1% expected earlier. Even in the Eurozone, CPI inflation in Germany eased to 11.3% in Nov’22 versus 11.6% in Oct’22, suggesting moderation in pace of rate hikes going forward. Focus is now on Central Bank meetings in the US, Eurozone and UK.

Except China, global equity indices closed higher. With a moderation in US CPI, markets anticipate a softer pace of rate hike by Fed in the near term and are pricing terminal rate just below 5% mark. FTSE rose the most, followed by S&P and Hang Seng. Sensex rose by 0.6%, led by 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, other global currencies made strong gains against the dollar. DXY declined by 1.1% to a 6-month low, as US CPI rose less than expected in Nov’22. EUR edged up by 0.9% as Germany’s investor sentiment index improved further in Dec’22. INR depreciated by 0.3% due to higher oil prices. However, it is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. Lower CPI as well as core CPI print in the US in Nov’22 raised hopes of a softer rate increase by Fed, thus US 10Y yield fell the most by 11bps. Even a softer CPI print in Germany led its 10Y yield close a tad lower by 1bps. On the other hand, UK’s 10Y yield rose by 10bps as average weekly earnings data rose more than expected, adding to woes of BoE. India’s 10Y yield fell by 3bps (7.27%), supported by below 6% CPI print. It is trading further lower 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

USFed raised rates by an expected 50bps. However, the commentary was much more hawkish with projections of Fed Funds rate at 5.1% in CY23, thus implying another 75bps rate hike. This also effectively rules out the possibility of a Fed pivot next year. Growth projections for CY23 were revised lower while unemployment rate was projected to edge up, signalling a slowdown in the economy. In further signs that global inflation has peaked, CPI in UK eased to 10.7% in Nov’22 (est. 10.9%), from a 41-year high of 11.1%. China’s economic woes continued with retail sales, fixed assets investment and industrial production missing estimates in Nov’22. Jobless rate also picked up to 5.7% from 5.5% in Oct’22. Japan recorded a trade deficit for the 16th straight month as imports grew at a faster pace than exports.

Global equity indices ended mixed tracking US Fed policy decision. Stocks in the US and UK fell in last trading session, as Fed Chair hinted at ‘ways to go’ in terms of policy rate to control inflation. Asian markets broadly closed higher driven by technology stocks. Sensex rose by 0.2%, led by real estate and metal stocks. However, it is trading lower today in line with other Asian stocks, on account of muted high frequency data in China.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except CNY (flat), other global currencies edged up against the dollar. DXY fell by 0.2% as the Fed revised its growth projections for CY23 lower. GBP rose by 0.5% as inflation eased. EUR also gained 0.5% despite a dip in industrial production. INR appreciated by 0.4% amidst positive global cues. However, it is trading weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. While US 10Y yield fell by 2bps, it inched up by 1bps each in Germany and UK. Traders remained cautious tracking Fed policy decision and also awaiting BoE and ECB’s policy. UK’s inflation print gave slight comfort, falling from its 41-year high aided by cooling fuel prices. China’s 10Y yield fell by 4bps, on expectation of more stimulus. India’s 10Y yield also fell by 4bps (7.22%) led by lower WPI print. It is trading higher at 7.24% 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

Both ECB and BoE hiked policy rates by 50bps, in line with expectations. Their commentary was fairly hawkish, with the ECB Chief hinting at more rate hikes to keep inflation in check. Further, while ECB cut its growth forecasts, BoE warned of a prolonged recession, aggravating fears of a global slowdown. To add to these woes, economic data from US disappointed. Retail sales fell by 0.6% in Nov’22 MoM, from an increase of 1.3% in Oct’22. Industrial production also declined 0.6% versus an increase of 0.3% in Oct’22. EM central banks in Philippines and Taiwan also hiked rates. In India, trade deficit narrowed sequentially as imports decelerated.

Global equity indices closed lower. Markets remained worried as major central banks (ECB, BoE and Swiss National Bank) struck a hawkish tone in their recent policy, to control inflation. US stocks fell the most, led by muted high frequency data (retail sales and industrial production). Asian stocks also fared badly as US Commerce department imposed some restrictions on Chinese chipmaker and other companies. Sensex fell by 1.4%, led by technology and metal stocks. However, it is trading lower today in line with other Asian stocks, on account of fear of recession.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies fell across the board. DXY rose by 0.8% as the Fed projected a higher than expected terminal rate. GBP fell the most by 2% as BoE raised concerns on growth. JPY fell by 1.7% as Japan recorded a trade deficit for the 16th straight month. INR depreciated by 0.4%. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. UK’s 10Y yield fell the most by 7bps as traders have anticipated inflation had already peaked in Oct’22 from the policy statement. US 10Y yield fell by 3bps as macro data showed softening economic activity. Germany’s 10Y yield on the other hand rose by 14bps as ECB Chief hinted at “more ground to cover, we have longer to go”, in terms of rates and inflation. India’s 10Y yield rose by 4bps (7.27%). It is trading higher at 7.28% 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