Economic Weekly Wrap
12 February 2024 - 16 February 2024

Investors attention is likely to be cued on to the US inflation data to offer more guidance on possible path for interest rates. The Central Bank might be forced to delay its plan for any interest rate cuts (Possibly in May’24), if inflation turns out to be hotter than anticipated. Retail sales and labor market data will also warrant the attention of investors this week. Separately, inflation in Germany (3.1% vs 3.8%) and France (3.4%-2 year low) eased, fuelling bets of interest rate cuts by ECB. BoJ’s Governor in his recent remarks stated they might continue with the accommodative conditions for a longer period even if it abandons the negative interest rate policy. On domestic front, investors will track inflation and industrial production data.

Global stocks ended mixed. Nikkei recorded a 34-year high as it briefly breached the 37,000 mark (first time since 1990s). S&P 500 notched up gains as it touched the 5000-milestone mark for the first time. Investors will await inflation and labour data in order to assess the future path of interest rates. Sensex ended in by green led by a gains in banking and consumer durable stocks. It is trading higher today, while other Asian stocks are trading mixed.

Global currencies closed mixed, with EUR and GBP making gains against the US$, JPY flat, and INR lower. DXY eased, as market participants try and gauge timing of Fed’s rate cuts and BoJ’s increase in short-term rates. INR fell by 0.1% amidst marginal rise in oil prices. However, it is trading stronger today, in line with other Asian currencies.

Global yields inched up. Yields in US were impacted by investor sentiment ruling in a favour of Fed keeping rates higher for longer, while eyeing Jan’24 CPI data due this week. Probability of Fed delaying rate cuts has increased and it is believed that other Central Banks may follow the suit. India’s 10Y yield rose by 3bps, but is trading a tad lower at 7.10% today.

A slew of economic data from the US is expected to provide guidance on Fed’s outlook on interest rates. In addition to the CPI print scheduled to release later today, PPI report and retail sales data will also be closely monitored. Investors are pricing in no rate cut in Mar’24 (84.5%), while the likelihood of rate cut in May’24 has also dropped down to 61% (95% in the beginning of the year). Additionally, Federal Reserve Bank of New York in the survey of consumer expectations noted inflation for 1Y and 3Y remain unchanged at 3% and 2.5%, with rise in inflation 3 years from now, is estimated at 2.4% (lowest since Mar’20). Separately, in India, CPI inflation moderated to 5.1% (5.7%in Dec’23) led by food inflation. Industrial production advanced higher to 3.8% (2.4% in Nov’23) in Dec’23.

Global stocks ended mixed. US indices closed in green, awaiting the CPI report to offer some guidance as to when will Fed begin the rate cut cycle. European indices opened higher with investors monitoring corporate earnings. Sensex ended in red and was dragged down by losses in real estate and power stocks. However, it is trading higher today, in line with other Asian stocks.

Barring EUR (lower), other currencies closed flat against the dollar. Markets in Japan and China were closed. DXY inched up ahead of US CPI data. INR ended flat, despite dip in international crude oil prices. However, it is trading a bit higher today, while other Asian currencies are trading mixed.

Global 10Y yields closed mixed. 10Y yield in the US remained stable while it fell in UK and Germany. Given the strength in US economy investors are uncertain of a rate cut by Fed in May’24 as well. They await cues from CPI report due today for more guidance. India’s 10Y yield fell a tad by 1bps, as oil prices inched down. It is trading a tad higher at 7.10% today.

Investors monitored the most awaited CPI print which surprised and came in higher than expected at 0.3% in Jan’24 on MoM basis (estimated: 0.2%) from 0.2% in Dec’23. Core CPI (excl food and fuel) was up by 0.4% (from 0.3%) highest increase since Apr’23. This has pushed back expectations of any imminent rate cuts by Fed. According to CME Fed watch tool, rate cuts are now likely (74.4% chance) in Jun’24 Japanese Yen continued to weaken with government authorities stating, they can take ‘appropriate actions’ if required. Separately, OPEC in its monthly report noted the demand for oil is expected to increase (unchanged from last month) by 2.25mn bpd and by 1.85mn bpd in CY24 and CY25 respectively. These forecasts are higher than the forecast by IEA (1.24mn bpd).

Global stocks ended mixed. US indices closed in red after hotter than expected CPI print, turned down the expectations of rate cut by Fed. European indices slipped and were dragged down by losses in technology and media stocks. Amongst other indices, Nikkei surged the most. Sensex (0.7%) advanced, led by sharp gains in banking and IT stocks. However, it is trading lower today, in line with other Asian stocks.

Except INR (flat), other major global currencies closed lower against the dollar. DXY strengthened by 0.8% following upside surprise in US inflation. JPY fell the most (-1%). Analysts are expecting BoJ to intervene in the forex market. INR ended flat, but is trading lower today, in line with other Asian currencies.

Barring Japan and India (flat), other global 10Y yields ended higher. 10Y yield in US and UK rose the most. Higher than expected CPI print in the US has pushed the possible timing of Fed rate cut from May’24 to Jun’24. India’s 10Y yield ended flat, despite inch up in oil prices. However, following global cues, it is trading higher today at 7.12%.

Oil prices climbed up amidst tensions around Middle East.

The recently released macro data has pushed back the rate cut expectations by Fed from as early as Mar’24 to Jun’24. Chicago Fed’s President Goolsbee noted Fed will remain on path of achieving 2% target even if the prices increase a bit more than expected in the coming months. Additionally, Fed Vice Chair Barr stated the path to achieve the target might be a ‘bumpy one’ and it is too early to talk about whether the ‘economy will end up with soft landing or not’. Separately, Japan’s economy slipped in to recession after unexpected contraction of 0.4% in Q4CY23 was noted (- 3.3% in Q3CY23). This was on account of dip in private consumption which has major share (-0.2% versus estimate of 0.1%). Given this weaker than expected print, investors see the possibility of any rate hike might not be justified in the near term. With this, Germany becomes the third largest economy as Japan slips to 4th position.

Barring Nikkei, other global indices closed lower. US indices rebounded as investors monitored earnings, supported by gains in stocks of ride-hailing platform. US markets are now amongst the 3rd most valuable globally. Sensex (0.7%) lifted up, led by sharp gains in oil & gas and power stocks. It is trading higher today, in line with other Asian stocks.

 Global currencies closed mixed against the dollar, with EUR and JPY gaining and GBP declining. DXY fell by 0.2%, awaiting remarks from Fed officials and awaiting retail sales data. INR ended flat, despite dip in international oil prices. However, it is trading higher today, in line with other Asian currencies

 Barring yields in Asia (higher), other global 10Y yields ended lower. 10Y yield in UK fell the most. Lower than expected CPI print in the UK has refuelled hopes of an early rate cut by BoE. Investors in the US also await comments from Fed officials for guidance on rates. India’s 10Y yield was up by 1bps. However, following global cues, it is trading lower today at 7.0%.

Oil prices slipped amidst reports of more crude stocks than expected.

Softer than expected retail sales print in the US has fuelled bets of dovish outlook by Fed. As per the CME Fed watch tool, odds of rate cut in May’24 jumped up to 40%, for Jun’24 they were around 80%. On the other hand, fall in weekly jobless claims signalled strength in labour market. Investors will await PPI report for more cues. Separately, after Japan, now the UK’s economy has slipped in to technical recession. The economy shrank by 0.3% for Q4CY23 on a quarterly basis compared with contraction of (-) 0.1% in the Q3CY23. This was led by broad based decline across the sectors, services (-0.2%), production (-1%) and construction (-1.3%). Furthermore, weakness in labour market and persistently high inflation added to the contraction. However, analyst expect the recession will be short lived with recovery expected in CY24, with inflation likely to moderate.

Global indices closed higher. US indices ended in green as hopes of a possible rate cut by Fed resurfaced after disappointing retail sales data (-0.8% from +0.4% in Dec’23). Nikkei surged by 1.2% and is on course to record an all-time high. Sensex (0.3%) continued to advance supported by gains in oil & gas and power stocks. It is trading higher today, in line with other Asian stocks.

Except INR, other major currencies closed higher against the dollar, with EUR and JPY gaining the most. DXY fell by 0.4%, dragged by drop in treasury yields. INR ended flat, despite increase in international oil prices. It is trading a tad higher today, in line with other Asian currencies.

Global 10Y yields ended mixed. 10Y yields in US, Japan and India fell, while they were up in UK and Germany. With sharper than expected decline in US retail sales, hopes of rate cut by Fed in Jun’24 have firmed up. India’s 10Y yield fell by 2bps, even as oil prices rose. Following global cues, it is trading further lower today at 7.08%.

Oil prices rose on the hopes of rate cut by Fed, following weak macro data