Economic Weekly Wrap
18 March 2024 - 22 March 2024

Industrial production in the US rebounded (MoM) in Feb’24 as it rose by 0.1% (est.: 0%), following downwardly revised (-) 0.5% decline noted in Jan’24. Improvement was led by business equipment, construction and materials. On the other hand, University of Michigan’s consumer sentiment index eased in Mar’24 to 76.5 from 76.9 in Feb’24, dragged by sub-index of consumer expectations. Current conditions index remained unchanged. Elsewhere in Asia, in China, retail sales growth in JanFeb’24 slowed to 5.5% (est.: 5.6%) from 7.4% in Dec’23, despite it being a festive season in that period. Industrial production on the other hand jumped by 7% (est.: 5.3%) in Jan-Feb’24 from 6.8% in Dec’23. FAI, an indicator of investment, also beat expectations (3.2%) and rose by 4.2% in Jan-Feb’24 versus 3% in CY23. This week, markets await decisions of US Fed, BoE, BoJ, and RBA.

Except Shanghai Comp (higher), global stock indices closed lower. Investors remained cautious amidst anticipation of delayed start to the rate cut cycle by Fed. Apart from this, expectation of a likely pivot by BoJ after 8 years, also impacted investor sentiments. Sensex fell by 0.6%, led by oil and gas stocks. However, it is trading higher today, in line with other Asian stocks.

Except EUR and CNY, other global currencies ended weaker against US$. DXY rose by 0.1%, supported by continued increase in US treasury yields. Amongst major currencies, JPY depreciated the most by 0.5%, ahead of BoJ’s policy decision. INR was marginally weaker, monitoring movement in oil prices. But it is trading stronger today, while other Asian currencies are trading lower.

Except China, global yields closed higher. US 10Y yield rose by 2bps as uncertainty around the timing and quantum of Fed rate cuts remains, owing to revival in price pressures and sustained economic momentum. India’s 10Y yield rose by 2bps, as pressure from elevated oil prices remains. It is trading further higher today at 7.08%

Oil prices remained broadly unchanged, but registered 4% gain in the week

In line with market expectations, BoJ hiked rates for the 1st time in 17 years, as it increased short-term rates (primary policy tool) to 0-0.1% from (-) 0.1%. Negative rates had been in place since 2016 and the latest decision has been taken in view of Central Bank being confident in achieving 2% inflation target on sustainable basis from Jan’24 onwards. BoJ has also abolished YCC policy. Yen is holding ground so far, as the impact of this will be felt over the coming months. Separately, Reserve Bank of Australia also announced its decision to hold rates (cash rate at 4.35%) unchanged, in line with market expectations. The Central Bank acknowledged that while the inflation is coming down, it’s more due to goods inflation, while services inflation remains elevated. Tightness in labour market and wage growth were also cited as cause of concerns. Next, investors await decisions of US Fed and BoE.

Except FTSE (lower), other global stock indices closed higher. US indices ended in green ahead of the Fed meeting. Moreover, gains in technology related stocks supported the market. Nikkei climbed higher, followed by gains in Shanghai Comp. Sensex rebounded led by gains in metal and auto stocks. However, it is trading lower today, while other Asian stocks are trading lower.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR and CNY, other global currencies ended weaker against the dollar. DXY rose by 0.1% as investors awaited key Central Bank decisions this week. Gains in 10Y yield added to dollar’s strength. INR ended flat. But it is trading weaker today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed mixed. Yields in US, Germany and India rose, while they fell elsewhere. Investors await Fed’s policy outcome for further guidance. Yields in Japan awaited BoJ’s decision. BoJ has announced today that it is moving away from its negative rate and YCC regime. India’s 10Y yield rose by 3bps, following rise in oil prices. It is trading flat today at 7.09%.

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 14 Mar 2024 and 15 Mar 2024

Oil prices jumped by 1.8%, due to supply side concerns (Iraq & Saudi exports).

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Stronger than expected housing starts data in the US has raised uncertainty around Fed’s timing and quantum of rate cuts. Housing starts rose to 1.52mn units in Feb’24 (est.: 1.43mn units), up from 1.37mn units in Jan’24. Bulk of this demand comes from single family units which rose to 1.13mn units in Feb’24—highest since Apr’22. Single family unit building permits (indicator of future construction activity) also jumped to ~1.5yr high. Businesses are offering discounts and compromising on size of the units to negate the impact of high mortgage rates. Separately, optimism in Germany has returned as Germany’s ZEW economic sentiment jumped in Mar’24 to 31.7 (est.: 20.5) from 19.9 in Feb’24. Domestically, RBI’s monthly bulletin stated that with the help of improving corporate balance sheets, government’s capex thrust and structural improvements in private demand, India can sustain 8% growth momentum.

Global stock indices ended mixed, as investors monitored the landmark decision by BoJ of ending negative rates. The focus will now shift towards upcoming Fed meet. Wall Street made strong gains, followed by Nikkei. On the other hand, Sensex ended in red and was dragged down by losses in IT and power stocks. However, it is trading higher today, while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except CNY (flat), other global currencies ended lower against the dollar. DXY continues to climb up (0.2%) with the spotlight now on speech by Fed Chair to offer guidance on rate outlook. JPY weakened to near 4-month low, post BoJ’s decision. INR depreciated amidst higher oil prices. However, it is trading stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring India, other global 10Y yields inched down. Yields in China, US, and UK fell the most. Investors keenly await Fed’s rate decision (due today), to gauge whether the 1st rate cut will be delivered in Jun’24 or not. The chances remain uncertain following strong housing starts report. India’s 10Y yield rose by 1bps, due to inch up in prices. It is trading flat today at 7.10%.

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 14 Mar 2024 and 15 Mar 2024

Oil prices rose, as supply concerns persist (Russian refineries attacked).

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets assessed the US inflation data to determine the trajectory of Fed rate cuts. For now, investors believe a rate cut in Jun’24 as most likely (probability of 64.3% as per CME FedWatch Tool). A key ECB policymaker also suggested that the central bank is likely to begin its rate cut cycle in “spring” as victory against inflation was in sight. Weakness in the economy continued with industrial production declining more than expected by 2.1% in Jan’24, from an increase of 1.6% in Dec’23. In UK, GDP growth rebounded and increased by 0.2% in Jan’24 after declining by 0.1% in Dec’23 on a MoM basis. In Japan, focus remains on the spring wage negotiations with expectations of a sizeable increase, which is fuelling expectations of a hawkish pivot by BoJ. Volatility is expected in oil markets after Ukraine’s attack on Russian oil refineries which will weigh on domestic markets.

Except Dow and FTSE (higher), global stock indices closed lower. Investors refrained from holding strong positions ahead of major data release in the US (retail sales and PPI data). Apart from this, focus also remained on Japan’s spring wage negotiations reflecting that wage hike might be on the cards. Sensex fell by 1.2%, led by power and real estate stocks. It is trading further lower today, while Asian stocks are trading mixed

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY retreated (0.4%) post Fed’s rate decision where it projected three rate cuts are likely this year. The focus will now turn towards BoE rate decision, due later today. INR depreciated further. However it is trading stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring China, other global 10Y yields inched further down. Fed in its policy statement reiterated that it expects 75bps cut in policy rates this year. Also, members believe that strength in labour market will not impact inflation, thus further raising probability of a cut in Jun’24. India’s 10Y yield fell by 1bps, as oil prices eased. It is trading further lower today, at 7.07%.

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 by 1.6%, weighed down by Fed’s rate decision.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

A busy week for global central banks came to an end with a slew of decisions across the globe. Bank of England maintained status quo with hint of a dovish tilt. On the other hand, Swiss National Bank surprised with a 25bps rate cut. Fed recently kept the rates unchanged and reiterated the likelihood of 3-rate cuts this year. Global equity indices recorded an all-time high close. US economy continued to signal strength in the economy on the back of incoming data (fall in unemployment claims and higher sales of previously owned homes). Separately in Japan, headline inflation accelerated to 2.8% from 2.2% in Feb’24. Even core inflation (excl food) jumped up to 2.8% (2% in Feb’24). India’s flash composite PMI edged up to 61.3 in Mar’24 (fastest pace in 8-months) from 60.6 in Feb’24.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR, other global currencies ended broadly weaker against the dollar. DXY rose by 0.6% amidst positive macro data (jobless claims and existing home sales). GBP depreciated the most by 1% after BoE rate decision. INR appreciated marginally as oil prices eased. However, it is trading weaker today in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan, global yields edged down. US 10Y yield fell by 1bps as expectations of a rate cut in Jun’24 solidified after Fed statement. A surprise rate cut by Swiss National Bank also bolstered hopes of lower global rates. India’s 10Y declined by 4bps following global cues and strong demand in SDL auction. It is trading higher 7.06% 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 funds data as of 14 Mar 2024 and 15 Mar 2024

Oil prices fell amidst weaker demand and lower crude inventories from US.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research