Economic Weekly Wrap
21 May 2024 - 24 May 2024

Fed officials remained jittery about the trajectory of inflation. Fed Vice Chair signalled policy rate is likely to be restrictive for some time unless policymakers are convinced that current inflation slowdown is not transitory. Atlanta Fed President also hinted at more time before price stability will be achieved. Reserve Bank of Australia’s latest minutes signalled higher for longer rates on the back of upside risks to inflation. Even some statements in the minutes could not rule out the possibility of rate hike. Elsewhere, global commodity prices are on an uptrend. Gold and copper prices are trading at near high levels. This got reflected in the Bloomberg Commodity Spot index which rose to its highest since Jan’23. Thus, yields globally firmed up. On domestic front, all eyes are on the progress of General Elections.

Except Dow Jones, other global stocks ended in green. Investors’ focus remained on minutes of Fed meeting and earnings reports. Stocks in Asia rose sharply, with Nikkei surging by 0.7%. Sensex rose marginally by 0.1% in the special trading session with capital goods stocks leading the gain. However, it is trading lower today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research | Note: Markets in India were closed on 20 May 2024; Sensex and Nifty as of 18 May 2024

Global currencies closed mixed. DXY edged up by 0.1% as Fed officials reiterated the need for keeping policy sufficiently restrictive while monitoring the path of inflation. JPY remained under pressure and depreciated by 0.4% with investors looking for signs of possible intervention. INR is trading stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research | Note: Markets in India were closed on 20 May 2024

Barring China (lower), global yields closed higher. Yields showed upside pressure tracking comments of major Fed officials which showed discomfort with regard to inflation. UK’s 10Y yield firmed up by 4bps despite BoE Deputy Governor hinting at rate cut ‘some time over the summer’. China’s 10Y yield showed moderation over concerns surrounding its property sector. India’s 10Y yield inched up, taking global cues. It is trading at the same level today

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research | Note: Markets in India were closed on 20 May 2024

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research | Note: Markets in India were closed on 20 May 2024

Fig 5 – Liquidity

Source: RBI, Bank of Baroda Research | Note: Markets in India were closed on 20 May 2024

Fig 6 – Capital market flows

Source: Bloomberg, Bank of Baroda Research | Note: Markets in India were closed on 20 May 2024

Oil prices fell as expectations of higher US rates dented demand prospects.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Fed officials again gave conflicting signals on future direction of rates. Atlanta Fed President hinted at favourable conditions for lowering rates by the end of the year. Fed vice Chair however signalled caution on the back of US economy’s solid footing. Fed Governor was also of the same tone and pointed out that several good inflation numbers are needed to begin the rate cut cycle. Thus, even if one rate cut translates this year, the rate cut journey by Fed is likely to be a slow one. Elsewhere in Germany, PPI inched down. ECB President indicated rate cut in Jun’24. In Japan, trade deficit widened as exports grew at a slower pace (8.3%, YoY in Apr’24 compared to 7.3% in Mar’24) and imports picked up (8.3% compared to -5.1%). On domestic front, RBI’s report on state of the economy has remained bullish on growth and pointed to cautious approach about policy based on evolution of inflation.

Global stocks ended mixed. US indices rose, led by gains in tech stocks. S&P 500 rose the most by 0.3% to a record high. Markets in Asia were mostly lower. Hang Seng led the losses declining by 2.1%, amidst a decline in basic materials and industrial stocks. Sensex declined by 0.1%, dragged down by technology shares. However, it is trading higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies traded in narrow ranges amidst lack of fresh drivers. DXY rose by 0.1% as Fed officials advocated the need for patience before cutting rates. On the other hand, EUR was marginally weaker as ECB President hinted at the possibility of a rate cut in Jun’24. INR appreciated marginally. It is trading further stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields closed lower ahead of release of Fed minutes. Investors closely monitored comments from several Fed officials. The inflation expectation index of US is due to be released this week. UK’s 10Y yield fell the most as CPI is expected to moderate in Apr’24. US and Germany’s 10Y yield also edged down. India’s 10Y yield fell a tad. It is trading at 7.07% today.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies traded in narrow ranges amidst lack of fresh drivers. DXY rose by 0.1% as Fed officials advocated the need for patience before cutting rates. On the other hand, EUR was marginally weaker as ECB President hinted at the possibility of a rate cut in Jun’24. INR appreciated marginally. It is trading further stronger today, while other Asian currencies are trading mixed.

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 15 May and 16 May 2024

Oil prices declined further on demand concerns due to higher US rates.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Markets remained abreast monitoring slew of data releases globally and assessing Fed minutes. Flash manufacturing PMIs across major economies such as US (50.9 compared to est.: 49.9), UK (51.3 against est.: 49.5) and Germany (45.4 against est.: 43.5), gained momentum. Services PMI for all these economies remained in expansion mode (above the 50-mark). In US, jobless claims again pointed to stickiness in labour market, new home sales data of the region however showed moderation. Minutes of FOMC reflected the tone of higher for longer rates. Recent speech of Atlanta Fed Chief hinted at a cautious approach. Thus markets are pricing in a delayed response on rate cut by Fed. Elsewhere in Japan, core CPI softened thus raising doubts about BoJ’s future course of action. On domestic front, RBI announced windfall transfer of surplus to the government.

 Global indices ended mixed. Stocks in US declined led by expectations of higher for longer US rates. Hawkish Fed minutes coupled with strong economic data supported this view. FTSE also ended lower amidst concerns over political stability. Sensex rose sharply by 1.6%, led by auto stocks. It is trading further higher today, while other Asian stocks are trading mostly lower.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

DXY climbed for the 4th consecutive session as macro data as well as Fed minutes indicated a delayed start to the rate cut cycle. Despite an improvement in economic activity in the Eurozone, EUR ended weaker. INR is trading stronger at a 1-month high today, while other Asian currencies are trading lower.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda, Note: Markets in India were closed on 23-05-2024

Global yields closed mixed. Yields across major economies such as US, UK and Germany firmed up as investors are pushing back the timing of rate cut by Fed. In UK, sticky CPI data has dialled down expectation of softer policy by BoE. India’s 10Y yield fell by 4bps supported by RBI’s record high surplus transfer to the government. It is trading at 7.03% today. 07.10 GS 2034 is trading at 6.99%.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research, Note: Markets in India were closed on 23-05-2024

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 15 May and 16 May 2024

Expectations of subdued US demand weighed on oil prices.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research