Economic Weekly Wrap
04 December 2023 - 08 December 2023

Manufacturing PMIs from across regions indicates that activity continued to remain under pressure in Nov’23. US ISM manufacturing index came in at 46.7 (est.: 47.8), unchanged from Oct’23. In case of Eurozone, activity contracted at a slower pace (44.2 versus 43.8) as the PMIs moved up a tad in both Germany (42.6 versus 42.3) and France (42.9 versus 42.6). Asia remains a brighter spot as India’s manufacturing activity continued to improve in Nov’23 (56 versus 55.5 in Oct’23). Pick up in South Korea’s exports in Nov’23 (7.8% versus 5.1% in Oct’23) also gives hope of improving demand conditions. Separately, oil prices fell sharply as OPEC+ members opted for less than expected voluntary cuts (2.2mn bpd) for early next year.

Barring Nikkei and Hang Seng, other global indices ended lower. US indices closed in green, supported by optimism of Fed beginning with the rate cut cycle soon (US PCE-Fed's gauge of inflation rose in line with expectation). Sensex too advanced, supported by gains in power and cap good stocks. It is trading further higher today while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except EUR (flat), other global currencies ended higher against the dollar. DXY retreated by 0.2% amidst commentary by Fed officials which signalled dovish bets. Yen strengthened, as expectation of BoJ leaving the ultra-loose monetary policy increased. INR appreciated as oil prices dipped. However, it is trading lower today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. 10Y yields in US (-13bps) and Germany (-9bps) fell the most, as muted manufacturing PMI data from across regions reaffirmed the views that major central banks are done hiking rates. Analysts are even pricing in a rate cut by Fed in H1CY24, even as Fed Chair Powell’s latest speech suggested otherwise. India’s 10Y yield rose a tad to 7.29%, even as oil prices dropped. Following global cues, it is trading lower today at 7.27%.

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, Mutual fund data as of 28 and 29 Nov 2023

Oil prices fell as OPEC+ announced less than expected production cuts

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

US factory orders in Oct’23 declined (-3.6% MoM) more than expected (-3%), following downwardly revised print of 2.3% growth in Sep’23. Within this, durable manufacturing orders declined by -5.4%, unchanged from previous month and core orders (proxy for business investment) were down by -0.3% versus est.: -0.1%. This supports the view that rate hike bets are off the table, but Fed Chair’s latest remarks have brought uncertainty about the timing of rate cuts. Elsewhere in Asia, services activity in Nov’23 is showing mixed trends. In Japan, it rose at a slower pace with PMI index coming in at 50.8 versus 51.6 in Oct’23, while in China it accelerated (51.5 versus 50.4). In Australia, activity weakened further in Nov’23 (46 versus 47.9). To bring inflation in check, RBA has held rates unchanged in today’s policy decision.

Barring Sensex, other global indices ended lower. US indices too ended in red; investors deemed the possibility of Fed pivot as too optimistic and await the release more economic data (US Jobs report). Nikkei declined and was dragged down by losses in chip making stocks ahead of the release of the inflation data. Sensex climbed up led by gains in oil & gas and banking stocks. It is trading higher today while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended lower against the dollar. DXY rebounded by 0.4% ahead of the US jobs report. Euro declined after subdued data from Germany (exports) and awaited the release of GDP and retail sales data. INR depreciated despite the dip in oil prices. It is trading weaker today while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. 10Y yields in US (+6bps) and UK (+5bps) inched up the most, as investors reacted to Fed Chair Powell’s statement indicating that it is premature to talk about rate cuts. Labour market data for US is also awaited to gauge future trajectory of Fed rates. India’s 10Y yield fell by 2bps to 7.27%, as oil prices dropped and is trading flat 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, Mutual fund data as of 29 and 30 Nov 2023

Oil prices decline further, led by sluggish global manufacturing activity.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Adding to weakening global growth conditions, Australia’s Q3CY23 GDP print shows that growth slowed more than expected (0.4%) to 0.2% (QoQ) in Q3, from 0.4% in Q2. Drag came mainly from net exports and household consumption. This has reaffirmed the views that RBA is done with its rate hiking cycle. Q4 looks even weaker with services PMI down to 46 in Nov’23 from 47.9 in Oct’23. In Eurozone too, conditions remain bleak with services activity continuing to contract, albeit at a slower pace (48.7 versus 47.8). Similar trend was seen in both Germany and France. On the other hand, services activity is showing some momentum in China (51.5 versus 50.4) and US (ISM at 52.7 versus 51.8), and slight moderation in India (56.9 versus 58.4). In US however, labour market is loosening, as JOLTS data showed that job opening fell to 8.7mn in Oct’23 (est.: 9.3mn) from 9.4mn in Sep’23.

Barring Sensex, other global indices ended lower. US indices dropped amidst softening data (lower than expected Jobs report) as investors tried to gauge the trajectory of Fed’s interest rate path. Hang Seng and Shanghai Comp declined sharply after rating agency downgraded China’s credit outlook. Sensex advanced to a new high supported by gains in power, consumer durable and banking stocks. It is trading higher today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except JPY and INR (flat), other global currencies ended lower against the dollar. DXY advanced (0.3%) amidst growing optimism that Fed is at the end of monetary tightening. EUR was lower given dovish commentary by ECB officials. It is trading stronger today while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring China (flat), other global yields closed lower. Steep declines were noted in 10Y yields of UK (-17bps), Germany (-11bps) and US (-9bps). Weaker than expected US labour market data, dovish commentary from ECB officials and likelihood of a recession in the UK impacted investor sentiments. India’s 10Y yield fell by 1bps to 7.27%. It is trading further lower today at 7.25%.

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, Mutual fund data as of 30 Nov and 1 Dec 2023

Oil prices declined by 1.1% over concerns of demand from China.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Labour market in the US is continuing to show signs of loosening, as ADP data shows that private payrolls were up by only 103k (est.: 120k) in Nov’23, easing from downwardly revised 106k in Oct’23. Conditions in Germany also remain under pressure with factory orders (MoM) in Oct’23 declining by (-) 3.7% versus est.: +0.2% and 0.2% increase in Sep’23. With weakening economic conditions, analysts are pricing in higher probability of rate cuts next year. ECB is expected to begin lowering rates from Mar’24 and cumulatively by 150bps. CME’s Fed watch tool also suggests 60% chance of Fed cutting rates from Mar’24 (cumulatively by 125bps). Muted improvement in China’s export growth in Nov’23 (0.5% versus est.: -1.5% and -6.4% in Oct’23) is unlikely to change the course of global growth slowdown.

Barring US indices and Shanghai Comp, other global indices ended higher. Investors monitored renewed bets of Fed beginning with rate cuts soon, amidst signs of labour market cooling off. On the other hand, Sensex climbed to a record high supported by strong gains in power and oil & gas stocks. However, it is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR, other global currencies ended lower against the dollar. DXY inched up by 0.1% ahead of the crucial non-farm payrolls report. EUR was lower amidst growing optimism that ECB will start with rate cut as early as Mar’24. INR strengthened by 0.1% supported by falling crude prices. It is trading weaker today in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Barring India (flat) and China (higher), other global yields closed further lower. 10Y yields of UK, US and Germany fell the most. With economic activity slowing, investors are pricing in increased probabilities of rate cuts next year (- 125bps by Fed and -150bps by ECB). India’s 10Y yield closed flat, ahead of RBI’s monetary policy decision. It is trading a tad lower at 7.24%.

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, Mutual fund data as of 1 Dec and 4 Dec 2023

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Initial jobless claims data in the US is indicating steady slowdown in the labour market, with claims increasing to 220k for the week ending 2 Dec 2023, up by 1k from the week before. Continuing jobless claims remain at its highest since Dec’21. In Eurozone, it was confirmed that GDP contracted by (-) 0.1% in Q3. Data from Germany suggests that Q4 is also expected to be bleak. German industrial output fell for the 5th consecutive month in Oct’23, by (-) 0.4% (MoM) versus est.: 0.2% increase and (-) 1.4% decline in Sep’23. In Asia, Japan’s economy remains under stress as Q3 GDP figures were revised downward to (-) 2.9% (est.: -1.9%) from previously estimated (-) 2.1%. Worryingly, major drag came from revision in private consumption (-0.2% versus 0%). Capital expenditure also declined, but less than anticipated (-0.4% versus -0.6%).

Barring FTSE and US indices, other global indices ended lower. Investors await jobs report to gauge Fed’s next move. The CME Fed watch tool points to a 64% chance of a rate cut in Mar’24. Nikkei declined the most, amongst other indices. Sensex slipped after a 7-day rally and was dragged by metal stocks. However, it is trading higher today; Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR (flat), other global currencies ended higher against the dollar. DXY retreated (by 0.6%) ahead of the non-farm payrolls report. JPY surged after comments by BoJ Governor Ueda hinted of a possible phasing out of the long held ultra-loose monetary policy. INR is trading stronger today while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. 10Y yields in Japan, US and UK inched up while they fell elsewhere. Japan’s 10Y noted the sharpest increase as BoJ Governor hinted at moving away from negative rates. Investors also await US non-farm payroll report to gauge Fed’s rate trajectory. India’s 10Y yield fell by 1bps, awaiting RBI’s monetary policy decision. It is trading flat 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, Mutual fund data as of 1 Dec and 4 Dec 2023

Oil prices continue to decline as worries build up on Asian demand.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research