Economic Weekly Wrap
05 August 2024 - 09 August 2024

A perceptible slowdown in US labour market spooked global investors and bolstered the case for the start of an aggressive policy easing cycle by the Fed. US non-farm payrolls eased to 114,000 in Jul’24 (est. 178,000). Unemployment rate inched up to 4.3% from 4.1%, the highest level since Sep’21. Wage growth eased to 0.2% from 0.3% in Jun’24 (MoM). The weak macro data has raised fears of a US recession leading to a sharp sell-off in global markets. Investors also rejigged expectations of the future course of Fed policy. While a Sep’24 rate cut has largely been priced in, there is a growing belief that the quantum could be higher at 50bps. Further, majority of market participants now see the Fed fund rate at 4.25-4.75% by Dec end, implying at least 3 rate cuts this year. This weighed on the dollar. In India, South-West monsoon is 4% above LPA which has helped Kharif sowing. RBI’s policy decision will be the key driver for markets.

Global equity indices closed lower, as weak US data has led to fears of a recession in the US. Apart from this, other factors driving equity flows ranged from tensions in the Middle East, weak macro data in China and volatility in commodity prices. Asian stocks fell the most. Sensex fell by 1.1%. It is trading further lower today, in line with other Asian indices.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Except INR, other global currencies ended stronger against the dollar. DXY declined by 1.2% after US jobs report. JPY appreciated by 1.9%. INR depreciated to a fresh record-low of 83.75/$, despite lower oil prices. It is trading further weaker today, while other Asian currencies are trading mostly stronger.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields closed lower. US 10Y yield fell the most as reports suggested money market traders are pricing increased quantum of rate cuts by the Fed. Similar impact was felt in yields of other AEs which showed a softening bias. India’s 10Y yield fell by 2bps, monitoring auction results. It is trading further lower at a ~28-month low of 6.86% 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: Data for Mutual Funds as of 30 Jul and 31 Jul 2024

Oil prices fell to an 8-month low on expectations of weak US demand.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

The sell-off in global markets continued as investors assessed the possible impact of a US recession. Stocks worldwide witnessed steep declines, while commodity prices also inched down. However, a Fed officials including San Francisco Fed President and Chicago Fed President played down the possibility of the US economy slipping into a recession. This was reinforced by macro data signalling an uptick in US services activity. US ISM services index returned to the expansionary zone at 51.4 in Jul’24 from 48.8 last month. There was a similar rebound in services activity in Japan (53.7 vs. 49.4). Services PMI in China (52.1 vs. 51.2) and UK (52.5 vs. 52.1) also picked up. In the Eurozone however, services PMI declined for the 3rd straight month to 51.9. On the domestic front, India’s services PMI was broadly steady at 60.3 in Jul’24 from 60.5 in Jun’24, amid continued momentum in new export orders.

Global indices ended lower, led by a sharp free fall in Nikkei. Unwinding of the carry trade contributed to the steep fall in Nikkei, which dropped to its lowest since Jan’24. Volatility in global currencies on the back of weak demand outlook in US and China, coupled with policy divergence, dampened investor sentiments. Sensex fell by 2.7%, tracking global cues. It is however trading higher today, in line with Asian stocks.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Except INR and GBP, other global currencies appreciated. DXY fell by 0.5% despite a rebound in US services sector activity. JPY appreciated by 1.6%. INR closed at a fresh record low amid heavy losses in domestic equities. It is trading further weaker today, while other Asian currencies are trading mostly stronger.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

 US 10Y yield closed flat tracking comments of Fed officials who reiterated the need of not allowing labour market to cool off substantially. Thus, signalling easing monetary policy conditions. Japan’s 10Y yield fell at the sharpest pace by 16bps amidst asset allocation readjustment. India’s 10Y yield maintained its downward momentum supported by anticipation of softening of global yields.

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: Data for Mutual Funds as of 31 Jul and 01 Aug 2024

Global commodity prices declined amid muted demand outlook.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Global markets recovered after a sharp sell-off at the start of the week as investors assessed the global economic outlook and monetary policy. Investors sought comfort from dovish statements from Fed officials who insisted that the weakening momentum in US labour market is not necessarily a harbinger of a recession. Volatility in the markets is likely to remain high amid an unwinding of the yen carry trade post the BoJ rate hike and hawkish comments from BoJ Governor. However, recent comments from BoJ Deputy Governor downplaying future rate hikes in times of market volatility should help ease some nerves. In India, INR continues to slump to fresh record lows amid persistent equity outflows. RBI is likely to keep a steady watch on the market developments while focusing on the inflation mandate. We expect status quo in policy rate and stance in the RBI meeting.

Global indices recovered, supported by Nikkei which rose by 10.2%. Some realignment of expectations took place amidst anticipation of intervention by central bank officials in the wake of financial market volatility. Hang Seng moderated. Sensex also fell by 0.2%, led by consumer durables stocks. It is trading higher today, in line with Asian stocks.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

 Global yields closed higher as risk-on sentiment improved after a buying spree in the last couple of trading sessions. Japan’s 10Y yield rose the most by 11bps followed by US 10Y yield due to realignment of portfolio. India’s 10Y yield rose by 2bps, in line with global cues. It is trading at the same level today, ahead of RBI’s policy.

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: Data for Mutual Funds as of 1 Aug and 2 Aug 2024

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Calm returned to the global markets after comments from BoJ Deputy Governor who pushed back against the possibility of rate hikes at a time when the markets are unstable. His comments were in sharp contrast to the BoJ Governor who indicated that more rate hikes are imminent, a statement which contributed significantly to the upheaval in global financial markets due to the unwinding of the so-called carry trade. In other news, China’s export growth moderated to 7% in Jul’24 (8.6% in Jun’24), missing estimates of a 9.7% increase. However, imports increased at a much faster pace of 7.2% (est. 3.5%) after declining by 2.3% in Jun’24. Separately, industrial production in Germany increased by 1.4% in Jun’24 (YoY), beating estimates of a 1% increase. In India, RBI meeting remains key, with investors focusing specifically on RBI’s assessment of the inflation trajectory.

Barring US stocks, global indices recovered. Some comfort was provided by commentaries of BoJ officials, which pacified volatility in the financial market. FTSE rose the most followed by Hang Seng and Nikkei. Fears of recession and a drag in technology stocks, have led to moderation of Dow Jones and S&P 500. Sensex rose by 1.1%, led by oil and gas and metal stocks. It is trading lower today, while Asian stocks are trading mixed.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

Global yields closed mixed. Germany’s 10Y yield rose the most followed by US. In Germany, better industrial production data comforted yields. In US, fragilities concerning financial market drove the selling spree in treasuries. China’s 10Y yield inched down amidst expectation of monetary easing. India’s 10Y yield fell a tad 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: Data for Mutual Funds as of 2 Aug and 5 Aug 2024

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

US jobless claims declined more than expected last week, suggesting that bets of an imminent recession in the world’s largest economy might be unfounded. Weekly jobless claims declined by 17,000 to 233,000 (est. 240,000). This comes on the heels of US jobs report last week which showed a significant slowdown in US labour market. Separately, CPI inflation in China inched up to 0.5% in Jul’24 (est. 0.3%) from 0.2% in Jun’24 on the back of higher food prices. Underlying price pressures however remained contained, as core inflation eased to 0.4% from 0.6% in Jun’24. Deflation in PPI was steady at 0.8% in Jul’24. In India, RBI maintained a status quo, but flagged risks due to high food inflation. Risks to financial stability due to high growth in credit card spends and deposit mobilisation were also highlighted.

Global indices closed mixed amid a confluence of mixed factors at play. On one hand, US jobless claims softened, hinting at tight labour market. On other hand, commentary of Kansas Fed official reflected some bit of cautiousness on rate cuts. US stocks edged higher. Nikkei fell, as anticipation of policy divergence persisted. Sensex fell by 0.7%, as RBI flagged some liquidity risks in the banking sector. It is trading higher today, while Asian stocks are trading mixed.

Fig 1 – Stock Markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda

US 10Y yield rose by 4bps as rebalancing of portfolio continued amidst mixed macro-economic data. Japan’s 10Y yield fell by 5bps as expectations centred on future course of action by BoJ, amid conflicting comments from BoJ Governor and Deputy Governor. India’s 10Y yield rose a tad. It is trading at the same level today, as no new guidance on liquidity was provided by RBI.

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: Data for Mutual Funds as of 5 Aug and 6 Aug 2024

Oil prices increased as geo-political tensions outweighed demand concerns.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research