Economic Weekly Wrap
14 November 2022 - 18 November 2022

IMF recently warned of a gloomier outlook for the world economy than was anticipated in the WEO (Oct’22). The downside risk are emanating from the worsening of global PMI print and monetary tightening to curb high inflation. However, some data points offer glimmer of hope, including softening of US inflation which might trigger Fed to slowdown the tightening path. Additionally, lifting of the Covid-19 curbs in China along with issuing of new policies to rescue property sector is expected to boost demand. Investors will closely monitor CPI and WPI from India along with G20 summit scheduled this week.

Except FTSE, other global indices closed higher on the back of cooler than expected inflation print from US signalling the likelihood of less aggressive monetary tightening by Fed. Hang Seng surged by 7.7% after China announced easing down of stringent Covid-19 restrictions. This was followed by gains in Shanghai Comp and Nikkei. Sensex too ended in green led by strong gains in IT and metal stocks. It is trading higher today while Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed higher against the dollar and DXY fell by 1.8%. Investors’ appetite for riskier assets increased as softer than expected US inflation data boosted hopes of pullback in aggressive monetary tightening by Fed. JPY and EUR gained the most. INR also appreciated by 1.2% and is trading further higher today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. While 10Y yields in Germany (15bps) and UK (7bps) rose the most, they fell in India and Japan. Germany’s yield curve inverted for the first time since Sep’08 indicating increased recessionary fears. Germany’s 2Y bond yield closed at 2.19%. Yields in UK reacted to BoE’s plan to gradually phase out its bond-buying program. India’s 10Y yield fell by 4bps to 7.31%, supported by healthy demand at RBI’s weekly auction. It is trading even lower today at 7.28%.

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 1 Nov 2022 and 2 Nov 2022

Crude oil prices rose by 2.5% to US$96/bbl, amidst relaxation of Covid-19 norms in China. Gold prices too inched up.

Fig 7 – Commodities

Global markets reacted to comments from Fed’s Christopher Wallace who cautioned the “endpoint” of rates is still “a ways off”. He also said that inflation continues to remain high despite the moderation seen in Oct’22. Elsewhere in China, a sharp spike in Covid-19 cases in major cities may deter the government from easing restrictions even as the economic outlook becomes increasingly dim. Recent data showed that China’s retail sales fell for the first time since May’22 and industrial production slowed further. In Japan, GDP growth declined by 1.2% against expectation of a 1.2% increase. Inflationary pressures in India eased with both CPI and WPI inflation moderating in Oct’22. Even so, RBI is expected to continue with the rate hikes with a terminal repo rate at ~6.5%.

Except FTSE and Hang Seng (higher), other global indices closed lower as investors await US PPI report (due later today) and also assessed statements by Fed officials and digested choppy earning results of tech companies. In UK, market participants await budget announcement due later in the week. Sensex too ended in red, dragged down by power, cap goods and consumer durable stocks. It is trading flat today while other Asian stocks are trading lower.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except CNY, other global currencies depreciated against the dollar. DXY rose by 0.3% amidst hawkish comments from Fed Governor Christopher Wallace. EUR fell by 0.2% even as Euro Area’s industrial production rose more than expected. INR depreciated by 0.5% led by global cues. However it has opened stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. While 10Y yields in US, UK and China rose, yields in Germany and India declined. US Fed officials have hinted that rate hikes should continue. Investors await US PPI data for more cues on inflation trend. In China, rising Covid-19 cases have increased fears of a more severe growth slowdown. India’s 10Y yield fell by 2bps to 7.29%, supported by trend in inflation data. 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 │Note: Mutual funds data as of 1 Nov 2022 and 2 Nov 2022

Crude oil prices declined by 3% to US$ 93/bbl, as a surge in Covid-19 cases in China’s major cities dimmed hopes of relaxation in lockdown restrictions.

Fig 7 – Commodities

Data from US painted a mixed picture. Industrial production growth declined by 0.1% in Oct’22 (est. +0.1%), after increasing 0.1% in Sep’22 (MoM). On the other hand, retail sales rose by 1.3% (est. 1%) on a MoM basis. The continued resilience in consumer spending may give Fed room to raise rates further. Fed officials Mary Daly and Christopher Waller, also hinted at more tightening ahead. As a result, US yield curve inversion deepened further. In UK, inflation continued to surge and rose to a 41-year high at 11.1% from 10.1% in Sep’22. This has raised expectations that BoE may raise rates by another 50bps in its next meeting. UK Finance Minister is also likely to announce tax hikes and a cut in expenditure to control inflation.

Except Japan and India, other equity indices elsewhere closed lower. S&P 500, and Hang Seng fell the most. S&P 500 was dragged down by retail stocks as retail giant Target, presented a gloomy outlook ahead of the holiday season. Sensex on the other hand ended higher, supported by banking, cap goods and tech stocks. It is however trading lower today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed. DXY declined by 0.1% as investors monitored US macro data (retail sales and industrial production). EUR gained 0.4% as geo-political concerns subsided. GBP too rose by 0.4% as UK CPI inched up to a 41-year high in Oct’22. INR depreciated by 0.3% despite easing oil prices. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. 10Y yields fell sharply in US and Europe. UK’s 10Y yield fell by (15bps) and US by 8bps. While industrial production data for US has raised hopes for Fed dialling back on future rate hikes, continued increase in retail sales suggests otherwise. US yield curve inversion deepened. India’s 10Y yield rose by 1bps to 7.27%. It is trading further lower at 7.25% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

In RBI’s T-bill auction, rates fell across tenures, with 364-day down by 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 1 Nov 2022 and 2 Nov 2022

Crude oil prices fell by 1.1% led by easing geo-political tensions. Demand concerns resurfaced amidst rising Covid-19 cases in China.

Fig 7 – Commodities

Fed’s James Bullard advocated for more rate hikes stating that the rate hikes so far “had only limited effect on observed inflation”. Hence policy rates may have to be hiked upto 5%-5.25%. US housing market continued to show signs of stress owing to rising rates, with housing starts falling by 4.2%. Labour market conditions however remained buoyant, with jobless claims remaining near historic lows. UK government announced its budget focussing on fiscal consolidation and tax increases to tame surging inflation. EM central banks continued with policy tightening, with Indonesia and Philippines announcing hikes of 50bps and 75bps respectively.

Except Dow Jones (flat), other global indices ended lower amidst hawkish commentary by Fed officials. Markets were also cautious monitoring geo- political developments in Europe. Hang Seng (1.2%) dropped the most. Sensex (0.4%) too ended in red led by subdued global cues. It was dragged down by consumer durable and auto stocks. It is trading lower today while other Asian stocks are trading higher.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended lower against the dollar. DXY gained by 0.4% after comments from Fed officials pushed back hopes of pivot, with more hikes likely forthcoming. GBP dropped after the government unveiled its fiscal plan of higher taxes and spending cuts. INR depreciated by 0.4% and opened stronger today. Other Asian currencies are trading mixed in the morning session today.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except China and Japan, other global yields edged up. US 10Y yield edged up the most by 8bps amidst hawkish comments from Fed’s James Bullard. UK’s 10Y yield also jumped up by 5bps after the budget announcement. On the other hand, China’s bond yields fell by 4bps. India’s 10Y yield rose a tad by 1bps to 7.28%. It is trading further higher at 7.29% 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 1 Nov 2022 and 2 Nov 2022

Global oil prices fell by 3.3% to US$ 89.8/bbl, amidst demand concerns as Covid-19 cases in China continued to rise. Expectations of aggressive rate hikes by Fed also pushed prices lower.

Fig 7 – Commodities