Economic Weekly Wrap
01 July 2024 - 05 July 2024

Macro data from the US shows that inflation is cooling down and consumer spending has also weakened. PCE inflation moderated to 2.6% in May’24 from 2.7% in Apr’24. Core PCE too eased to 2.6% from 2.8% in Apr’24. On MoM basis, inflation index was flat (0%) compared with 0.3% increase in Apr’24. Further, University of Michigan final consumer sentiment survey showed that the headline index fell to 68.2 in Jun’24 from 69.1 in May’24, dragged by current situation index. Consumers now expect inflation at 3% versus 3.3% expected in May’24 survey. This has raised the possibility of a rate cut in Sep’24. However, increased political uncertainty (US and France) also impacted investor sentiments. Separately in China, manufacturing activity remains weak with official PMI index unchanged in Jun’24 at 49.5. Nonmanufacturing PMI also eased to 50.5 from 51.1 in May’24.

Global indices ended mixed. US stocks closed lower as investors monitored PCE data with investors expecting rate cut as soon as Sep’24. Shanghai Comp and Nikkei were the biggest gainers. Sensex closed in red, breaking away from its 4-day winning streak. Banking and IT stocks dropped the most. It is trading higher today, while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Barring Japan (lower), other global yields closed higher. US 10Y yield rose by 11bps, amidst growing uncertainty around US presidential elections. This was despite a lower inflation reading. Germany and UK’s 10Y yield closed higher by 5 and 4bps respectively. India’s 10Y yield was broadly stable amidst the much anticipated bond inclusion. It is trading at the same level 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 25 June and 26 June 2024

Oil prices remained flat, as investors track escalated geo-political tensions.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

As per the ISM data, US manufacturing PMI declined for the 3rd straight month, down to 48.5 from 48.7 and the price pressure on inputs eased to a 6-month low. Investors will track the JOLTS report, ADP data, non-farm payroll and Fed minutes, as this will offer more cues on rate outlook. Global investors also closely monitored the growing developments around the political space, ahead of the key elections. In Germany, inflation eased down in Jun’24 to 2.5% (lowest in 3-years) from 2.8% in May’24 led by lower energy prices. Core inflation also cooled off to 2.9% (previously 3%), while service inflation remained unchanged at 3.9%. This data print came in ahead of the Eurozone inflation which is expected to moderate down to 2.5% (2.6% in May’24) raising the likelihood of another rate cut possibly in Sep’24.

Barring FTSE (flat), other global indices ended higher. US stocks closed in green led by gains in technology stocks. Shanghai Comp surged by 0.9% after a surprising jump in manufacturing Caixin PMI which was in contrast with official data. Sensex ended higher supported by strong gains in IT and consumer durable stocks. It is trading further higher today, while other Asian stocks are trading lower.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research
Note: Hang Seng was closed on 1.7.2024

Global currencies ended mixed. DXY remained broadly stable despite a rally in US bond yields. EUR rose by 0.3% as investors sought comfort from a weaker than expected majority for the far-right parties in the French elections. JPY languished near a 38-year low. INR depreciated by 0.1%. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Except Japan and China, other global yields closed higher as investors assessed the political dynamics in US, UK and France. 10Y yield is US rose amidst growing expectations of a win for Republican candidate Donald Trump. In Germany and UK, 10Y yields rose by 11bps each. India’s 10Y yield ended flat at 7.01% and is trading at the same level 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 25 June and 26 June 2024

Oil prices rose amidst forecast of supply deficit given the OPEC+ cuts in Q3.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

US labour market data surprised on the upside, as JOLT survey results showed that 221k jobs were added in May’24 to reach 8.14 (est.: 7.91mn), up from 7.91mn in Ap’24. However, as the ratio of job openings to unemployed persons remains unchanged from the previous month at 1.22 (lowest since 2021), investors are continuing to expect Fed rate cut in Sep’24 (61.5% as per CME FedWatchTool). Fed Chair’s remarks that Central Bank is most likely to cut rates later this year has further raised hopes. Separately, ECB is expected hold rates steady, even as headline inflation in Jun’24 eased to 2.5% from 2.6% in May’24. Stickiness in core inflation (4.1% in Jun’24, unchanged from last month) remains a cause of concern. ECB President also stated the Central Bank will look out for indications that inflation is firmly back in control before cutting more rates.

Barring FTSE and Nifty, other global indices ended higher. US stocks closed in green ahead of non-farm payrolls data. Nikkei surged by 1.1% crossing the crucial 40,000 mark led by strong gains in banking and insurance stocks. Sensex ended flat and is trading much higher today, as it breached the 80,000 mark today. On the other hand, other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research
Note: Hang Seng was closed on 1.7.2024

Global currencies ended mixed. DXY edged down as investors monitored dovish comments by Fed Chair, signalling that easing cycle might begin later this year. GBP weakened ahead of the election. INR depreciated further by 0.1% despite fall in oil prices. It is trading weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields closed mixed. Yields in US and UK fell (3bps each), while yield inched up in Japan. Investors reacted to Powell’s dovish remarks indicating a rate cut later this year. Separately, BRC noted that UK’s May’24 ‘shop price inflation’ fell to its lowest level since Oct’21. India’s 10Y yield was stable, led by foreign inflows through JP Morgan index. It is trading lower at 7% 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 26 June and 27 June 2024

Oil prices dropped amidst increase in output from OPEC for 2nd straight month.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

A slew of data from the US signalled softening of economy and stoked hopes of Fed rate cut. This included signs of weakness in labour market, as was reflected by both ADP employment report (150,000 versus 157,000 in May’24) and the weekly jobless claims (rose more than expected-to 238,000). This comes ahead of the non-farm payrolls report. Additionally, the non-manufacturing PMI data from ISM surprised negatively, dropping down to 48.8 in Jun’24 from 53.8 in May’24, with weak employment levels. Furthermore, US factory orders contracted for the first time, after rising for 3-straight months (-0.5% in May’24 from 0.4% in Apr’24). Separately, Fed minutes noted that even as inflation is moving towards its target goal, the committee needs to see more information which will ‘give them greater confidence’ before they lower the rates.

Barring Dow Jones and Shanghai Comp, other global indices ended higher. US stocks closed in green amidst renewed hopes of rate cut, given softer labour data. Amongst other indices, Nikkei and Hang Seng surged the most. Sensex climbed higher by 0.7% led by strong gains in banking and metal stocks. It is trading further higher today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. DXY ended lower as a slew of macro data from the US reinforced views of a rate cut in Sep’24. Both EUR and GBP appreciated by 0.4% against the dollar. On the other hand, JPY depreciated further to hit a fresh 38-year low. INR depreciated marginally, tracking a rise in oil prices. It is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Except Japan and China, other major yields closed lower. 10Y yields of UK and US fell the most. Sharp decline in US ISM services index and softer ADP employment report, has further firmed the hopes of a Fed rate cut in Sep’24. India’s 10Y yield eased a tad, even as oil prices inched up. Following global cues, it is trading further lower at 6.99% 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 27 June and 1 Jul 2024

Oil prices rose, amidst dip in US crude stockpiles, and hopes of Fed rate cut.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

The recent softening of labour market data from US bolstered hopes of Fed rate cut as early as Sep’24. Investors cued in on the growing developments in Europe and remained on political watch. UK’s Labour party expected to form the new government, ending 14-years of conservative party rule. Separately, household spending data in Japan declined unexpectedly by 1.8% in May’24 (much lower than anticipated). Higher prices have weighed in on consumers’ purchasing power. Recently, the Q1CY24 GDP reading was also revised downwardly. This raises concerns on BoJ’s view on inflation remaining under the target and economy recovering at a solid pace. Thereby, complicating the Central Bank’s decision to raise rates. On the domestic front, FPI turned net buyers in Jun’24 after selling in the last 2-months, with financial and telecom sectors registering the highest flows.

Most of the global indices ended higher. FTSE climbed 0.9% ahead of the formation of the new government. On the domestic front, Sensex edged up by 0.1% led by gains in IT and real estate stocks. It is trading lower today while other Asian stocks are trading mixed. Nikkei even breached the 41,000 mark in the morning session.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research | Note: US indices were closed on 4 Jul 2024

Barring INR and CNY, other global currencies ended higher against the dollar. Amidst thin trading, due to the holiday in the US, DXY fell by (-) 0.3%. JPY, EUR, and GBP gained. Investor sentiments were impacted by political developments in the UK (Labour Party set to win) and France (hung parliament is likely outcome). INR was flat. It is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Except Japan and India, other major yields closed higher. Markets in US were closed. 10Y yields in Europe reacted to ongoing political developments. In UK, Labour party is set to form the new government. Markets also await US nonfarm payroll report. India’s 10Y yield ended flat, and is trading at similar levels today, amidst tepid bond inflows so far.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research | Note: US indices were closed on 4 Jul 2024

Fig 4 – Short term rates

Source: Bloomberg, Bank of Baroda Research | Note: US indices were closed on 4 Jul 2024

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 1 Jul and 2 Jul 2024

Oil prices remain steady, tracking dip in US stockpiles and UK/France elections.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research