Economic Weekly Wrap
22 July 2024 - 26 July 2024

A firmer dollar weighed on currency and equity markets globally. This is albeit a stronger case of rate cut expectations in the market (CME Fed watch tool pricing in a 94% probability for Sep’24 cut). Fed Governor (Chris Waller) also spoke of ideal scenarios (soft landing and softening core PCE deflator) for the beginning of an easing cycle. A shift in US political landscape with the current US President ending his re-election bid, will impart some degree of uncertainty to the rate outlook. Elsewhere, in UK, faster pace of public sector borrowing and piling up of debt impinged on its yield. ECB Chief on the other hand, spoke of Sep move being ‘wide open’ leading to speculation of data dependent approach by ECB in the near term. On domestic front, progress of southwest monsoon has been 2.4% below LPA, compared with 2% above LPA last year. Separately, People’s Bank of China lowered its 1 and 5Y LPR by 10bps to 3.35% and 3.85%, surprising markets.

Except China, stocks elsewhere declined. A global IT outage, simmering USChina trade conflict, political uncertainty in the US, and a downbeat growth outlook in China, weighed on investor sentiments. Hang Seng declined the most, followed by US stocks. Sensex too fell by 0.9%, led by losses in oil and gas and power stocks. It is trading lower today, in line with other Asian indices.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Except INR, other global currencies ended weaker. DXY rose further even as a Fed rate cut is imminent in Sep’24. GBP fell by 0.2%, led by weakness in UK’s retail sales. INR ended at its record low, amid higher dollar demand. It is trading at similar levels today, while other Asian currencies are trading mostly weaker.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

UK’s 10Y yield rose the most as UK’s government debt reached its highest level since 1962. 10Y yields in US and Germany also firmed up. Germany’s 10Y yield exhibited some stickiness as ECB Chief’s comments led to speculation of a laggard in Sep’24 cut. India’s 10Y yield closed stable. However, it is opened higher at 6.98% 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 15 Jul and 18 Jul 2024

Oil prices declined amidst demand concerns led by weaker growth in China

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets still centred around political developments in the US. Report suggested that the current VP of the US has enough pledged delegates to bag the nomination. On macro data front, there were no major releases. However, the coming days hold the cue as both growth and inflation data would shed some light on Fed’s Jun rhetoric. As of now, two rate cuts are priced in for CY24. On domestic front, the Economic Survey for FY 2023-24, laid the roadmap for Viksit Bharat. It pegged India’s growth rate at 6.5-7% in FY25, slightly lower than RBI’s projection. On inflation, it said that twin shocks of the pandemic and geopolitical conflict had impinged on its print. All eyes will be on Union Budget where fiscal prudence will hold the key along with a nudge in consumption and investment spending.

Global indices ended mixed. Investors assessed the political situation in the US after the current US President withdrew his re-election bid. Stocks in US rose, led by a rally in tech stocks. In China, stocks declined despite a rate cut by PBOC. Sensex declined by 0.1% led by losses in real estate and banking stocks. It is trading higher today ahead of the Budget announcement. Asian indices are also trading in green.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY fell by 0.1% tracking political uncertainty in the US. JPY appreciated by 0.3% as investors have increased bets of a rate hike by BoJ next week. INR depreciated marginally to close at a fresh record low, despite steady foreign inflows. However, it is trading stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields broadly closed higher led by UK. Mounting public sector debt is weighing on UK’s yield. Even Germany’s 10Y yield firmed up awaiting comments of ECB official. India’s 10Y yield closed stable and is trading at the same level. It is likely to have a softening bias as Budget would continue to focus on fiscal consolidation.

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 continued to decline led by expectations of muted demand.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global equity and currency markets remained under pressure while yields softened. A stronger dollar ahead of GDP and core PCE data of the region weighed on sentiments. Among major data releases, new homes sales in the US showed some downward momentum. Manufacturing PMI in Japan remained in contraction while services activity gained pace. Market is pricing in a meagre probability of a rate hike by BoJ in the coming week. On domestic front, Union Budget focussed on fiscal prudence. Quality spending has been the top priority with focus on employment generation and upskilling. Other flash points were boost to domestic manufacturing, improved credit access for MSMEs and thrust to housing.

Global indices ended weaker. Stocks in the US declined led by weak earnings reports by major tech companies. Caution also prevailed ahead of key data from the US and central bank meetings next week. Markets in Asia were subdued tracking weakness in China’s growth and possible escalation in US-China trade conflict. Sensex declined by 0.1%, after the Union Budget. Real estate and capital goods stocks fell the most. It is trading further lower today, in line with other Asian indices

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

US 10Y yield closed stable awaiting fresh cues from growth and inflation report scheduled this week. Germany’s 10Y yield fell the most as ECB official has hinted at a possible rate cut in Sep’24. In UK, 10Y yield showed some correction after witnessing increase post the release of public debt data. India’s 10Y yield closed stable and is trading at the same level.

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 declined further amidst possible cease fire in Middle East

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Flash PMIs of major economies painted an optimistic picture of global economy. Composite PMIs in US, UK, Japan and India improved significantly in Jul’24, while it dipped in Eurozone. The improvement in US and Japan was led by services activity, even as manufacturing activity contracted. In India, there was an improvement in both services and manufacturing PMI. On the global front, focus of investors remains on US core PCE data and Q2 GDP data. This will set the tone for the Fed meeting next week. BoJ meeting is also scheduled for next week, with expectations that the policy makers are likely to set the tone for interest rate hikes in later part of the year. In India, markets continue to evaluate the impact of Budget announcements. Progress of monsoon has been good, with rainfall now 1.4% above LPA.

Global stocks declined. Lacklustre earnings results from major US firms led to a sell-off in US equity markets. Technology stocks led the decline. Investors also monitored flash PMI readings of major economies. Stocks in Asia also ended in red, led by Hang Seng. Sensex declined further by 0.3%, led by heavy losses in banking stocks. It is trading further lower today, in line with other Asian indices.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY declined by 0.1% amidst mixed macro data. Traders await US PCE and GDP data due later in the week. On the other hand, JPY rose further by 1.1% ahead of BoJ meeting. INR slipped further to another historic low. It is trading flat today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Except India, other global yields broadly closed higher. 10Y yields in both US and UK increased by 3bps each. Investors assessed improvement in composite PMIs in the respective regions. Germany’s 10Y yield ended flat as economic activity in the region continued to remain muted. India’s 10Y yield declined by 1bps. It opened flat at 6.96% 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 18 Jul and 19 Jul 2024

Oil prices rose amidst a decline in US crude inventories.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets remained on vigil tracking host of macro releases. In the US, growth indicators pointed towards resilience with annualised GDP QoQ rising more than expected by 2.8% (est.: 2%) in Q2. This was supported by buoyant recovery in consumption demand. To supplement, even jobless claims especially the continuing claims moderated. Traders are likely to balance these events against the anticipation of rate cut by Fed. Elsewhere, in Germany, IFO business climate index softened indicating a bleak economic recovery. In Japan, core Tokyo CPI remained sticky, thus rate hike expectations for BoJ still reigned in. On domestic front, short end part of India’s yield curve is showing some downward momentum. Government’s move to pay off its short-term debt has acted as a positive market signal.

Barring FTSE and Dow Jones, other major global indices ended lower. US stocks were mixed as investors assessed varied macro prints such as higher GDP growth, decline in durable goods orders and lower jobless claims. In Asia, Nikkei saw a sharp sell-off, as a rally in Yen weighed on investor sentiments. Sensex declined by 0.1%, led by losses in real estate and banking stocks. It is however trading higher today, in line with other Asian indices.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY ended broadly stable as investors monitored US macro data. Amongst other currencies, GBP depreciated the most. INR recovered marginally but traded close to its record-low amidst weakness in domestic equity markets. It is trading weaker today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields closed lower. US 10Y yield has fallen the most albeit resilient economic data as market has already priced in a Sep cut by Fed. Germany and UK’s 10Y yield softened tracking weaker IFO and CBI Trends order data, respectively. China’s 10Y yield hit its record low as woes over recovery continued. India’s 10Y yield inched a tad lower and is trading at 6.94% 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 19th and 22nd Jul

Oil prices increased amid expectations of strong demand from US.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research