Economic Weekly Wrap
09 January 2023 - 13 January 2023

US nonfarm payrolls increased by 223,000 in Dec’22, slowing from 256,000 additions in Nov’22. This also marked the smallest pace of increase in 2 years. While unemployment rate dipped to 3.5%, wage growth slowed down. Other macro indicators were dismal. US ISM non-manufacturing PMI slipped into the contraction (49.6 in Dec’22 versus 56.5) for the first time since May’20. US factory orders also declined by 1.8% in Nov’22 (est. -0.8%), from an increase of 0.4% in Oct’22. Investors now expect the Fed to soften its stance, as the economy loses steam. Equity markets edged up, while dollar weakened. In the Eurozone, while headline inflation moderated to 9.2% in Dec’22 from 10.1%, core inflation accelerated. In this week, inflation numbers from China, US, Japan and India will be keenly observed.

Global indices ended mixed. Markets in US and UK rose the most as investors reacted to cooling inflationary pressures in the US (moderation in average hourly wage growth) and Eurozone. Shanghai Comp cheered PBOC’s move to support property sector. Sensex ended in red, dragged by tech and metal stocks. However, it is trading higher today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR, other global currencies edged up against the dollar. DXY fell by 1.1% as US ISM non-manufacturing PMI dropped sharply in Dec’22. A sharper than expected fall in US factory orders also impacted investor sentiments. GBP gained the most by 1.6%, followed by EUR (1.2%). INR depreciated by 0.2% amidst weakness in domestic equity markets. It is trading stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

While 10Y bond yields in Asia ended higher (Japan, India), yields in US and Europe closed lower. Weaker than estimated increase in average hourly wages in the US in Dec’22, indicates that inflationary pressures may be cooling down. Further dip in US ISM services PMI also shows that rate hikes are hurting real economy. India’s yield was up by 5bps, following weekly RBI auction. It is trading lower at 7.33% today, following global cues and GDP data.

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

Global commodity prices broadly edged up as investors pared back expectations of hawkish Fed. Oil prices however, declined marginally by 0.2%.

Fig 7 – Commodities

Increased expectations of a softer stance from the Fed drove global markets. Markets are now expecting the Fed rate to peak below 5%, along with expectations of a rate-cut in the latter part of the year. This drove dollar lower. Investor sentiment was also buoyed as China reopened its international borders after 3 years. As a result, equities edged up. Elsewhere in Europe, Germany’s industrial production rose more than expected by 0.2% in Nov’22 (MoM), versus est. 0.1% increase. Eurozone’s unemployment rate unchanged at a record low of 6.5% in Nov’22. US CPI data due later in the week, will determine the Fed rate path. Fed officials also stated that the monetary policy will be contingent on the evolving inflation trajectory.

Global indices ended mixed. Markets in the US closed lower amidst mixed commentaries from central bank officials. While San Francisco Federal Reserve President said a 50/25bps hike might be a possibility, Atlanta Fed President spoke of a 25bps rate hike. Asian markets got comfort with China’s reopening of borders with Hong Kong. Sensex ended in green led by tech and power stocks. However, it is trading lower today while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies strengthened against the dollar. DXY fell by 0.8% to a more than 6-month low amidst increasing best of a softer stance from the Fed. EUR gained by 0.8% as Germany’s industrial production rose more than expected in Nov’22. CNY also gained 0.8% amidst optimism over border reopening. INR appreciated by 0.4%, following global cues. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed mixed. In the US, 10Y yield fell by 3bps as New York Federal Reserve Survey of consumer expectations showed that near term inflation expectations are falling. Germany’s 10Y yield inched up by 2bps following upbeat industrial production data. India’s yield fell by 3bps (7.34%), tracking US 10Y yield. It is trading a tad lower at 7.33% 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

Global oil prices rose by 1.4% amidst an improving demand outlook, as China reopened its borders.

Fig 7 – Commodities

Bolstering the case of a global recession, World Bank slashed its global GDP forecast for 2023 to 1.7% from 3% earlier. This is on the back of synchronised monetary policy tightening, Russia-Ukraine war and worsening financial conditions. For India as well, GDP growth is expected at 6.9% in FY23 (7.4% earlier) and 6.6% in FY24 (7% earlier). Global headwinds and uncertainty is likely to weigh on investment and exports. Elsewhere, CPI inflation in Tokyo surged to a 40-year high at 4%. Even in Australia, inflation jumped back to 7.3% in Nov’22, after dropping to 6.9% in Oct’22. Retail sales rose by 1.4% in Nov’22 from 0.4%. In South Korea, unemployment rate rose to an 11-month high at 3.3% in Dec’22 from 2.9%.

Global indices ended mixed. Markets assessed Fed Chair’s speech, which again hinted at price stability being the main concern. This was also reiterated by Fed Governor Michelle Bowman. Stocks in US closed higher, led by technology stocks. Barring Nikkei, other Asian stocks closed lower amidst weakening macro data (higher CPI in Tokyo, worsening current account balance in S. Korea). Sensex ended in red, led by banking stocks. It is trading even lower today, while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies were mixed. After falling for two-straight sessions, DXY rose by 0.2% ahead of US CPI data. JPY depreciated by 0.3% as Tokyo’s inflation surged more than expected to 4% in Dec’22, putting pressure on BoJ. INR strengthened by 0.7% to a near 1-month high. It is trading further stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except India, global 10Y yields closed higher as Fed officials hinted at price stability being the primary concern. Thus, US 10Y yield rose the most by 9bps. Even in Germany, 10Y yield firmed up by 8bps as ECB Economic Bulletin highlighted strong wage growth in the next few quarters, which might pose risk to inflation. India’s 10Y yield fell by 3bps (7.31%), tracking fall in 5Y OIS rate. It is trading at 7.32% 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

Global oil prices rose by 0.6% to US$ 80/bbl, as EIA estimated global petroleum consumption to rise to a record high in 2024.

Fig 7 – Commodities

CPI inflation in China accelerated to 1.8% in Dec’22 (est. 1.8%) from 1.6% in Nov’22, led by higher food prices. Deflation in PPI also eased from -1.3% in Nov’22 to -0.7% in Dec’22, led by declining energy prices. With China easing most Covid-19 related restrictions, inflation is expected to accelerate in Q1CY23. On the other hand, US CPI due today is expected to moderate to 6.5% in Dec’22 from 7.1%. Core CPI is also expected to soften. Investors hence expect Fed to slow down the pace of rate hike to 25bps in Feb’22 versus 50bps in the last policy. Even in India, CPI inflation is expected to ease to 5.7% (our estimate) from 5.9% in Nov’22.

Except Shanghai Comp and Nifty (lower), other equity indices closed higher. Markets are awaiting US CPI data which is expected to moderate (est.: 6.5% against 7.1% earlier). On policy front, President of Federal Reserve Bank of Boston spoke of a 25bps rate hike in the coming policy. ECB policymakers also assured of not de-anchoring of inflation expectations. Sensex closed flat. It is trading higher today, while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed. DXY remained in a tight-range as investors await US CPI report due later in the day. EUR edged up by 0.2% supported by hawkish comments from ECB officials. CNY appreciated amidst optimism over reopening. INR appreciated by 0.3% despite higher oil prices. It is trading a tad weaker today, while other Asian currencies are trading stronger.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan and China (stable), global 10Y yields closed lower. Appetite for sovereign securities emerged due to a risk-off sentiment as World Bank flagged risks of recession. Expectations of softer CPI print in the US also impacted sentiments. UK’s 10Y yield fell the most, followed by Germany. India’s 10Y yield fell by 2bps (7.29%). It is trading at 7.3% today, ahead of CPI and IIP data.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

In the recent Rs 300bn auction of TBill, cut-off yield for 182-days paper remained flat, for 91-days it rose by 3bps and for 364-days, it fell by 3bps.

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

Global oil prices edged up further by 3.2% on the back of an improvement in demand outlook amidst reopening in China.

Fig 7 – Commodities

US inflation declined by 0.1% in Dec’22 (est. 0%) from +0.1% in Nov’22 (MoM). This marked the first decline in CPI since May’20. This has raised the possibility that the Fed may be nearing the end of the rate-hike cycle with a 25bps rate hike in Feb’22, and terminal rate peaking just below 5%. Investors have also increased bets of rate cut in the late 2023. In India as well, CPI inflation eased further, even though core inflation remained sticky. This suggests that RBI will hike rates by another 25bps before taking a pause. Bank of Korea raised policy rates by 25bps and signalled an end to its rate hike cycle. Elsewhere, news reports suggest that the BoJ may review its ultra-dovish monetary policy which buoyed JPY. Separate data showed that China’s exports and imports dipped sharply in Dec’22.

Barring India (lower), other equity indices closed higher. Markets got comfort from US CPI report. Reaction of Fed officials were mixed, while Richmond Fed President spoke of steering more deliberately, St Louis Fed President spoke of above 5% terminal rate. FTSE rose the most, followed by Dow Jones. Sensex fell by 0.2%. It is trading further lower today, while other Asian stocks are trading mixed, tracking muted trade data from China.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR (flat), other global currencies strengthened. A weaker than expected inflation report from US drove DXY to a ~7-month low. JPY gained the most by 2.5% as reports suggest that the BoJ may rethink its ultra-dovish monetary policy. EUR too edged up by 0.9% as ECB is likely to remain hawkish. INR is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (higher) and China (stable), global 10Y yields closed lower. Markets tracked softening of US CPI. US 10Y yield fell the most (10bps), followed by UK (7bps). Notably in Japan, 10Y yield crossed its ceiling of 0.5%, prompting BoJ to conduct unscheduled bond buying. India’s 10Y yield fell by 1bps (7.29%). It is trading a tad lower at 7.28% today, supported by moderation in CPI data.

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

Global oil prices rose by 1.6% supported by a weaker dollar and improved demand outlook.

Fig 7 – Commodities