Economic Weekly Wrap
26 December 2023 - 29 December 2023

Global markets traded in narrow ranges in the holiday thinned trading week. Data from US late last week showed that PCE index fell by 0.1% in Nov’23 on a MoM basis, noting its first negative reading since Apr’20. On a YoY basis, PCE moderated to 2.6% from 2.9% in Oct’23. Core PCE also moderated to 3.2% from 3.4% in Ocr’23 (YoY). This was also reflected in University of Michigan’s consumer confidence index rose sharply to 69.7 in Dec’23. New durable goods orders also rose steadily by 5.4% in Nov’23, after falling by 5.1% in Oct’23. On the other hand, new home sales fell by 12.2% to 590,000. Overall investors’ expectations of rate cuts by Fed have strengthened with an almost 75% probability (CME FedWatch) of the first rate cut in Mar’24. On the domestic side, RBI minutes highlighted that MPC members remained wary on inflation amidst the volatility in food prices.

Global equity markets refrained from holding any major positions in the holiday truncated week. US stocks monitored host of data releases such as core PCE which softened and also capital goods orders which inched up. Hang Seng and Shanghai Comp inched down. Sensex rose by 0.3%, supported by power and oil and gas stocks. It is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies traded in tight ranges. DXY fell by 0.1% to a 5-month low as investors view of rate cuts was reinforced after US PCE inflation moderated further. JPY continued to remain under pressure and fell by 0.2%. INR appreciated by 0.2% following a decline in oil prices. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields noticed thin trading. Japan’s 10Y yield rose by 4bps. UK’s 10Y yield fell by 2bps monitoring contraction in GDP in Q3. India’s 10Y closed stable at 7.19%. It is trading at the same level today. Notably, the bids received for 7-day VRR auction reflected tighter liquidity conditions and higher demand for funds.

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 marginally as investors monitored the situation in the Red Sea area.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

With many global markets still closed, trading volumes remained thin. In US, expectations of an imminent Fed pivot have led to a rally in stocks. On the other hand, DXY trailed near a 5-month low. After surging by 3.3% last week, global oil prices rose by another 2.5% yesterday, amidst fresh attacks in Red Sea region. In India, CAD moderated to 1% of GDP in Q2FY24 from 1.1% of GDP in Q1. This was led by higher net services receipts and remittances, even as merchandise deficit was higher. Separately, pressure on liquidity continued with deficit trailing at Rs 2.7lakh crore. As a result, overnight rate also inched up, with call rate at 6.81%. This is attributable to transient factors such as month-end GST outgo and advance tax payments, which would gradually smoothen out.

Equity markets traded in narrow ranges. Expectations of easing financial conditions in the US boosted S&P 500 which rose to its record high. CME Fed Watch tool is attaching a 71% probability for a rate cut beginning Mar’24 and reports have priced in cumulative cut of ~ 150bps next year. Nikkei also firmed up as BoJ minutes reflected some dovishness. Sensex rose by 0.3%, led by oil and gas stocks. It is trading higher today in line with Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Note: Markets in the UK and Hong Kong remained closed on 26 Dec 2023

Global currencies ended mixed against the dollar. DXY slid further by 0.2%, amidst strengthening expectations of rate cut by Fed in Mar’24. On the other hand, EUR rose by 0.3% as ECB hinted at keeping rates elevated for longer. INR depreciated by 0.1%, tracking higher oil prices. It is trading further weaker today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Note: Markets in the UK remained closed on 26 Dec 2023

Markets in UK and Germany were closed for a public holiday. US 10Y yield closed flat in absence of fresh cues. Markets have already priced in a pivot in the Fed rate cycle. China’s 10Y yield fell by 4bps ahead of major macro releases, which would provide cues for policy support. India’s 10Y closed stable at 7.18%. It is trading a tad higher at 7.19% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research │Note: Markets in UK and Germany remained closed on 26 Dec 2023

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 rose as tensions in the Red Sea area reignited supply side concerns.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global stocks continued to rally amidst strengthening expectations of Fed rate cuts. As per the CME Fed Watch tool, the probability of a rate cut in Mar’24 stands at 72.7%. Separately, macro data from Asia painted a mixed picture. Industrial production in South Korea rose at a solid pace of 3.3% in Nov’23 on a MoM basis versus estimate of a 1.4% increase. This was led by a sharp uptick in production of semi-conductors. On the other hand, industrial production in Japan fell by 0.9% in Nov’23 (MoM), following an increase of 1.3%. Separately, retail sales increased by 1% in Nov’23, after declining by 1.7%. In China, industrial profits rose by 29.5% in Nov’23, compared with 2.7%. However, the recovery was uneven, with the property sector continuing to post a lacklustre performance. In India, RBI’s report highlighted a healthy growth in balance sheet of both banks as well as NBFCs led by a pickup in credit growth. Asset quality and profitability also noted an improvement in H1FY24.

Equity markets closed higher. Traders ramped up expectations of a pivot in monetary policy cycle of major central banks in the last trading week of the year, with anticipation of ~ 150bps rate cut by Fed next year. Hang Seng rose the most, followed by Nikkei. Sensex rose by 1%, led by auto and banking stocks. It is trading higher today while Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR and CNY, other global currencies appreciated against the dollar. Prospects of lower Fed rates weighed on the dollar, with the DXY falling by 0.5%. EUR and GBP rose by 0.6%. INR depreciated by 0.2%, amidst increased dollar demand. However, it is trading stronger today, in line with its Asian peers.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields felt the reverberation of expectation of Fed rate cut in the coming year. US 10Y yield fell the most by 10bps. Even Germany and UK’s 10Y yield fell by 8bps and 7bps respectively. India’s 10Y rose by 2bps amidst tight liquidity conditions. Notably, the result of 2 day VRR showed that bids received were of much higher quantum. India’s 10Y yield is trading at 7.20% 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

Oil prices moderated amidst a build-up in US inventories.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Macro data from US suggested a further cooldown in economic activity, indicating that the Fed is on track to cut rates. Jobless claims rose by 12,000 to 218,000 versus consensus estimate of 210,000, marking a second consecutive weekly increase. Separate data showed that pending home sales remained flat at a record low, below expectations of a 1% increase, despite lower mortgage rates. CPI inflation in South Korea moderated to 3.2% in Dec’23 versus an increase of 3.3% in Nov’23. RBI’s Financial Stability Report highlighted that GNPA of SCBs declined further to 3.2% in Sep’23 from 3.9% in Mar’23. However, the report flagged some risks with regard to higher vintage delinquency in some personal loan segments. Further, macro stress tests results indicated that even under severe stress scenario banks’ CRAR is expected to remain above the minimum capital requirements

Global equity indices broadly closed higher. Traders are entering 2024 with a thoroughly dovish rhetoric, at least in case of Fed. Expectations are that the reverberation will be felt across major central banks, sooner or later. Hang Seng rose the most, followed by Shanghai Comp. Sensex rose by 0.5%, led by oil and gas stocks. It is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except EUR and GBP, other global currencies appreciated against the dollar. After falling for 4-straight sessions, DXY recovered amidst an uptick in US treasury yields. CNY appreciated by 0.5%. Following a dip in oil prices, INR strengthened and rose by 0.2%. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields broadly closed higher due to realignment of portfolio ahead of the last trading day of the year. UK’s 10Y yield rose by 6bps, followed by US and Germany, noting 5bps increase each. This is despite US jobless claims data pointing towards softer labour market conditions. India’s 10Y closed stable amidst announcement of 7-day VRR auction. It is trading lower at 7.19% 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 22 Dec 2023 and 26 Dec 2023

Oil prices moderated amidst easing supply-related disruption in the Red Sea.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research