Economic Weekly Wrap
15 January 2024 - 19 January 2024

The expectations of rate cut by Fed in Mar’24 has regained prominence (likelihood of rate cut at 79.5% from 73.2% in the previous week) given softer than expected PPI print (-0.1% in Dec’23 against expectation of +0.1%). Elsewhere, PBoC defied market expectation and kept the interest rate unchanged for medium term lending facility at 2.5% On the domestic front, CPI inflation rose to a 4-month high to 5.69% for Dec’23 led by food inflation which remained sticky at 9.5%. However, some moderation in prices is expected in the coming months. Investors this week will closely watch China’s GDP print for Q4CY23, industrial production, retail sales, unemployment and inflation figures for Japan scheduled to release later this week.

Global markets ended mixed. Investors in US monitored the quarterly earnings and better than expected PPI report. Nikkei continue to climb higher supported by gains in machinery, precision instrument and shipbuilding sectors. Sensex jumped by 1.2% to an all-time high led by strong gains in IT stocks. It is trading further higher today while other Asian stocks are trading lower

Global currencies closed mixed. DXY was up by 0.1%, owing to heightened geo-political risks (US & UK warplanes engaging in Yemen). EUR and GBP fell the most, while JPY also gained on safe haven demand. INR was up by 0.1%. It is trading further higher today, while other Asian currencies are trading mixed.

Except yields in Asia (flat/higher), global yields elsewhere closed lower. 10Y yields of UK and Germany fell the most. Weakness in China’s trade data and more than expected drop in US PPI drove investor sentiments. India’s 10Y yield was up by 2bps, as oil prices build up. However, following global cues, it is trading much lower today at 7.14%.

Oil prices rose by 1.1% owing to risks of supply side distributions (tensions in Middle East. protest in Libya, severe winter conditions in US).

In line with market expectation, Germany’s economy contracted in 2023 to 0.3% on the back of high inflation and weak foreign demand. Additionally, poor domestic demand and ‘unfavourable financing conditions’ due to higher rates added to the woes. Going ahead, analysts expect the fear of recession remains high in CY24. Separately, ECB officials have recently commented over pushback towards rate cuts as this might propel another wave of inflation. Investors have priced in 20% chance of rate cut as early as Mar’24 with a total of 150bps rate cuts this year. Elsewhere, Japan’s PPI climbed higher by 0.3% in Dec’23 on a MoM basis from 0.2% in Nov’23. On domestic front, India’s trade deficit narrowed to US$ 19.8bn in Dec’23 from US$ 20.6bn in Nov’23.

Global markets ended mixed. Investors’ monitored commentary by ECB officials on premature cutting of rates that could possibly push inflation higher along with poor GDP print from Germany. Powered by rally in shipping stocks, Nikkei for the first time in 34-years has crossed the 36,000 mark. Sensex extended its rally further scaling a new high led by strong gains in IT stocks. However, it is trading lower today in line with other Asian stocks.

Except INR and EUR (flat), other global currencies ended lower. DXY ended flat, owing to thin trading. However, it has opened higher today as investors reasses Fed’s possible rate cut trajectory. JPY fell the most as market participants scale back their expectations for BoJ’s change in policy stance. INR ended flat, however it is trading lower today, in line with other Asian currencies.

Global yields closed mixed. Germany’s 10Y yield rose by 5bps, while in Japan it fell by 4bps. Despite Germany reporting contraction in GDP in Q4CY23, one of the ECB member hinted that there is no room for a rate cut in CY24, as inflation is still not down to 2% mark. India’s 10Y yield also fell by 3bps, as oil prices eased. Awaiting more global cues, it is trading flat today.

Oil prices fell by 0.2%, as analysts await more cues on global demand.

A slew of data was released in China including the GDP print for Q4CY23 which climbed up by 5.2%, tad lower than the estimate (5.3%). For CY23, the economy has expanded by 5.2% with uneven recovery and global agencies expect a slower growth in CY24 amidst continued weakness in property market and ‘subdued external demand’. In CY23, fixed asset investment climbed up by 3% with higher growth in infrastructure and manufacturing. For Dec’23, retail sales rose (7.4% from 10.1%) at a slower pace while industrial output (6.8% from 6.6%) climbed up. Globally, focus would remain on interest rate outlook after Fed official made similar comments as ECB officials on not rushing towards lowering rates till there is more clarity on inflation.

Except Shanghai Comp, other global markets ended lower. Investors monitored comments by Fed Waller on lowering rates ‘carefully’ as inflation is nearing the Fed’s target goal. Developments around Red sea were carefully monitored. Sensex ended in red and was dragged down by losses in real estate and power stocks. It is trading lower today in line with other Asian stocks.

Global currencies ended lower. DXY jumped by 0.9%, trading at nearly onemonth high, owing to jump in treasury yields and uncertainty around timing of Fed’s rate cuts. JPY and GBP fell the most. INR was down by 0.2% following global cues and slight increase in oil prices. It is trading further lower today, in line with other Asian currencies.

Barring yields in the UK, China and India, other global yields closed higher. US 10Y yield noted sharpest jump (+12bps) following hawkish comments from Fed Governor Waller. As a result, investors scaled back their expectations of an early rate cut by the Fed. India’s 10Y yield ended flat and is trading at similar levels even today (7.15%).

Oil prices rose by 0.2%, as investors weighed supply side tensions in Red Sea

Withering the dual storm of restrictive monetary policy and inflation, US retail sales data climbed higher than expected and signalled strength in the economy. The pickup (0.6% from 0.5% in Nov’23) was boosted by higher motor vehicle and online purchases. This reports further underscores the probability of rate cut with investors pricing in a 53.8% chance of cut in Mar’24 from 63.1% earlier. Hawkish commentary by ECB officials also lowered the expectations of easing of global rates. Soft economic data from China which pointed towards patchy recovery also weighed on investor sentiments. Separately, UK’s inflation came in higher than expected at 4% (3.9% in Nov’23) led by higher prices of alcohol and tobacco, which in turn has dented rate cut expectations from BoE.

Global indices ended lower as investors pared back on the rate cut expectations and monitored economic outlook for China. Better than expected retail sales print in US also eroded bets of rate cut in Mar’24. Led by subdued global cues, Sensex too dropped registering the sharpest fall in over 19-months with deep losses in banking and metal stocks. It is trading further lower today in line with other Asian stocks.

Asian currencies ended lower, while GBP and EUR gained. DXY was up by 0.1%, supported by rising US treasury yields and better than expected macro data. JPY fell the most (-0.7%), owing to widening US-Japan interest rate differential. INR was down by 0.1%, even as oil prices fell. It is trading broadly steady today, while other Asian currencies are trading higher.

Except China, other global yields closed higher. UK’s 10Y yield rose the most. Higher than expected CPI print in the UK has revived concerns around timing of BoE’s rate cuts. ECB chief’s warning that inflation may again intensify and healthier than expected macro data from the US, also played on investor sentiments. India’s 10Y yield rose by 2bps, and is trading flat today.

Oil prices fell, strained by stronger US$ and weak macro data from China

Expectations of early rate cuts took a back seat as data sets (higher retail sales and sharp drop in Unemployment benefits) continue to signal strength in the US economy. In line with Fed, even ECB in its minutes had highlighted that it is premature to discuss policy easing. Separately, Japan’s inflation cooled off to 2.6% (lowest level since Jun’22) from 2.8% in Nov’23 with core inflation down to 2.3%. This data print comes ahead of BoJ’s policy meet which supports the Bank’s decision to wait before ending the negative rates. On domestic front, RBI’s monthly bulletin noted ‘potential output is picking up and actual output is running above it’ and this gap is moderate. Furthermore, government‘s push towards capex has started to crowd in private investment. On inflation, it noted Dec’23 print was due to unfavourable base and core inflation has moderated (lowest in more than 4-years).

Apart from Nikkei (flat) and Sensex (lower), other global indices ended higher. US indices climbed higher supported by gains in technology stocks amidst optimism surrounding AI. Lower jobless claims also provided further support. Sensex extended its fall and was dragged down by consumer durable and power stocks. However, it is trading higher today in line with other Asian stocks.

Barring EUR (lower) and GBP (higher), other global currencies ended flat. DXY was up by 0.1%, as investors scale back their expectations around Fed’s rate cut trajectory. GBP gained owing to dimmed hopes of rate cut by BoE any time before Q2CY24. INR ended flat, even as oil prices picked up pace. It is trading lower today, while other Asian currencies are trading higher.

Except UK (lower) and China (flat), other global yields closed higher. US’ 10Y yield rose the most. Better than expected retail sales data in the US and continued tightness in the labour market has raised uncertainty around the timing of Fed’s rate cuts. India’s 10Y yield rose by 1bps, as oil prices inched up. Following global cues, it is trading further higher today at 7.19%.

Oil prices rose as IEA upwardly revised its projections for oil demand in CY24.