Economic Weekly Wrap
14 February 2023 - 17 February 2023

Global markets await US CPI data for Jan’23, which is expected to come in at 6.2% down from 6.5% in Dec’22. Apart from this, macro data in Europe and Japan will also remain in focus this week. Japan’s Q4CY22 annualised QoQ GDP came in much lower than expected at 0.6% (est.: +2%) following -0.8% decline in Q3. Slower than expected rebound was owing to dip in capex (-0.5% in Q4). This is likely to delay BoJ’s decision to normalise its ultra-loose monetary policy till fiscal year 2024. Prolonged deviation in US Fed and BoJ’s policy is impacting Yen. On the domestic front, CPI surprised negatively, led by food inflation. RBI is likely to gauge CPI trend of Q4FY23 before taking the next rate decision call.

Global indices closed mixed. Investors remain cautious ahead of US CPI print. Further, slew of events such as Japan government’s nomination of BoJ Chief, Fed Governor Michelle Bowman’s comments on higher interest rate to control inflation, also impacted market sentiments. While stocks in the US rose the most, in Japan it fell sharply. Sensex fell by 0.4%, dragged by real estate and tech stocks. It is trading higher today, while Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

While Asian currencies ended weaker against the dollar, EUR and GBP made gains. DXY fell by 0.3% as investors await US CPI data to gauge Fed’s future course of action. Dollar rose against JPY and neared 6-week high as BoJ’s decision end to its ultra-loose policy seems delayed and will leave deviation between US Fed and BoJ for a longer period of time. INR fell by 0.3% as oil prices inch up. However, it is higher today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed mixed. Market is looking for cues on terminal Fed fund rate, which is contingent on the upcoming CPI print. Apart from this, soft landing in economies such as Germany, UK also impacted investor sentiments. While US 10Y yield fell by 3bps, those in UK and Japan inched up a tad by 1bps. India’s 10Y yield closed flat at 7.37%. It is trading higher at 7.39% today, tracking a higher than expected CPI data in Jan’23.

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 funds data as of 25 Jan 2023 and 27 Jan 2023

Global oil prices rose further by 0.3%, as supply concerns persist owing to Russia’s decision to cut oil output. However, demand fears also linger.

Fig 7 – Commodities

US CPI data for Jan’23 came in at 6.4% versus est.: 6.2% and 6.5% in Dec’22. In MoM terms too CPI was up (+0.5%) compared with 0.1% increase in Dec’22. Significant increase in clothing, medical care commodities, and transport services pushed inflation up on sequential basis. This has revived fears of elevated rates in the US for a longer duration of time. As a result, US equities fell/ended flat and yields inched up. Separately, second estimates of Eurozone Q4CY22 GDP confirmed that economic activity rose by 0.1%, thus avoiding recession. To keep global oil prices in check, US has announced it will release more oil (26mn barrels) from its strategic petroleum reserves to ease supply concerns. Thus, oil prices were down by 1.2%.

Global indices closed mixed. Investors reacted to hotter than expected US CPI print for Jan’23. Dow Jones (-0.5%) and Hang Seng (-0.2%) fell the most, while markets in India, UK and Japan gained. In Europe, earning results and indication of Eurozone avoiding a recession has been supportive for equities. Sensex rose by 1%, led by tech, banking and metal stocks. However, it is trading lower today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

While Asian currencies ended weaker/flat against the dollar, EUR and GBP appreciated. DXY fell by 0.1% following the release of US CPI data, and despite increase in 10Y yields. Although, US$ continues to trade near 6-week high against JPY, driven by expectation of prolonged deviation between US Fed and BoJ. INR ended flat. However, it is trading lower today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan, China and India (stable), global yields closed higher. UK’s 10Y yield rose the most by 12bps as labour market conditions remained tighter. Even in Germany 10Y yield inched up by 7bps as WPI data showed pick up on a sequential basis in Jan’23. In US, 10Y yield rose by 4bps tracking 0.5% sequential increase in its CPI print. India’s 10Y yield closed flat at 7.37% tracking moderation in WPI print. It is trading lower at 7.35% 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 funds data as of 25 Jan 2023 and 27 Jan 2023

Global oil prices fell by 1.2% following US government’s announcement that it will release more crude oil from its strategic petroleum reserves.

Fig 7 – Commodities

US retail sales increased by 3% in Jan’23 (est. 1.9%) compared with a decline of 1.1% in Dec’22. Manufacturing production also rose by 1% (est. 0.8%) after declining by 0.8% in Dec’22 (MoM). This coupled with the CPI report released earlier, has raised the possibility of higher terminal Fed fund rate. On the other hand, inflation in UK eased to 10.1% in Jan’23 (est. 10.3%) from 11.1% in Dec’22. More importantly, core inflation eased to 5.8% from 6.3%. This has raised the possibility that the BoE may opt for smaller rate hikes going forward. Separately, Japan’s trade deficit hit a record high in Jan’23, amidst a sharp slowdown in exports. Unemployment rate in Australia edged up to 3.7%, even as RBA Chief reiterated the need for more rate hikes. In India, trade deficit narrowed sharply amidst a decline in both exports and imports.

Global indices closed mixed. Investors remained cautious tracking better than expected US retail sales, moderation in UK CPI and ahead of Asian Central Banks’ (Indonesia and Philippines) policy decisions. Amongst major indices, Hang Seng fell the most, while FTSE rose sharply. Sensex rose by 0.4%, led by real estate and auto stocks. It is trading higher today, in line with Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

While Asian currencies ended weaker/flat against the dollar, EUR and GBP appreciated. DXY fell by 0.1% following the release of US CPI data, and despite increase in 10Y yields. Although, US$ continues to trade near 6-week high against JPY, driven by expectation of prolonged deviation between US Fed and BoJ. INR ended flat. However, it is trading lower today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. US 10Y yield rose by 6bps led by better than expected retail sales data. On the other hand, softening of CPI data in Jan’23 led to a 3bps decline in UK’s 10Y yield. India’s 10Y yield closed lower by 2bps (7.35%) tracking fall in oil prices. It is trading further lower at 7.34% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

In the latest Rs 290bn TBill auction, cut off yields rose across the board (91 days: +6bps, 182 days: +11bps and 364 days: +10bps).

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 funds data as of 25 Jan 2023 and 27 Jan 2023

Crude oil prices fell by 0.2% tracking movement in US crude storage buildup.

Fig 7 – Commodities

Latest US data shows that labour market continues to remain tight with initial jobless claims for the week ending 11 Feb 2023, falling by 1k to 194k. Further, US PPI rose by 6% (YoY) in Jan’23 versus est.: 5.6% and 6.2% in Dec’22. While this does not impact Fed’s policy decision directly, but it may add pressure on input costs which may then be passed onto the consumers, thus slowing the efforts made by Fed to cool down retail inflation. Overall strength in the US economy (robust retail sales) has increased the likelihood of 2 more rates hikes this year. Housing sector in the US is likely to continue to suffer from elevated rates (single family housing starts fell to 1.3mn units in Jan’23 versus est.: 1.35mn and down from 1.38mn in Dec’22).

Global indices closed mixed. While markets in US and China fell, Nikkei and Hang Seng gained the most. Investors reacted to latest US macro data (retail sales, jobless claims, PPI) pointing towards elevated policy rates in the near term as well. In Europe, better than expected earnings results helped banking stocks lift the markets. Sensex rose by 0.1%, led by realty, metals and cap good stocks. However, it is trading lower today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

While Asian currencies ended higher/flat against the dollar, EUR and GBP depreciated. DXY fell by 0.1%, despite increase in US yields. GBP fell, as faster than expected decline in UK’s inflation has increased chances of lower rate hikes by BoE. INR rose by 0.1%, supported by lower than expected trade deficit print and dip in oil prices. However, it is trading lower today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except US and UK (higher), other global yields closed flat/lower. US 10Y yield rose the most by 6bps as labour market conditions remain tight, and retail sales data shows resilience in consumer demand. It is now widely expected that Fed will continue to hike rates in the coming months as well. India’s 10Y yield fell by 3bps, as oil prices fell. However, tracking global cues, it is trading higher at 7.36% 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 funds data as of 25 Jan 2023 and 27 Jan 2023

Global oil prices fell by 0.3%, as worries over increased probability of US Fed rate hikes could dampen demand outlook.

Fig 7 – Commodities