Economic Weekly Wrap
16 January 2023 - 20 January 2023

Less aggressive monetary tightening by Fed owing to easing of CPI print, prompted dollar to drop to its lowest level since Jun’22. China’s house prices dropped for the 8-month in a row (1.5% in Dec’22) led by weaker demand due to Covid-19 outbreak. However, with the removal of Zero-Covid-19 policy and other measures by government, the property sector is expected to recover steadily. This week, BoJ’s is likely to tweak changes in the yield curve control (YCC) policy in its upcoming meet. China’s industrial output and GDP report will be tracked closely. Elsewhere, markets will also monitor statements by policy makers and central bank heads as they gather for World Economic Forum at Davos.

Barring Nikkei, other equity indices closed higher. Cool–off of US CPI offered hopes of possible peaking of interest rates in the coming months by Fed. Germany’s GDP inched up by 1.9% for CY22 and analysts now expect the economy might even dodge recession for CY23, despite difficult conditions. This further boosted investor sentiments. Both Hang Seng and Shanghai Comp rose by 1% each. Sensex too ended in green led by gains in metal and IT stocks. It is trading higher today, while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except EUR (lower), other global currencies strengthened on account of a weaker dollar due to softening of US CPI print. JPY gained the most by 1.1% as reports suggested that BoJ may further tweak its yield control policy. INR rose by 0.4% supported by FII inflows. It is trading higher today, while other Asian currencies are trading lower following Japan’s strong PPI data.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed higher. Risk on sentiment improved with better than expected GDP data in Germany, falling 1 year inflation expectation in the US and improved consumer sentiment, as highlighted in the University of Michigan survey results. Fed Reserve Bank of Philadelphia also spoke of inflation passing its peak. India’s 10Y yield rose a tad by 1bps (7.30%). It is trading at 7.31% 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 continued to climb higher (up by 1.5%) on the back of improved optimism over China’s demand outlook.

Fig 7 – Commodities

Global leaders at the ongoing WEF at Davos shared concerns that likelihood of global recession remains imminent in CY23, offsetting optimism of China reopening. China’s GDP has slowed significantly in CY22 compared with last year due to curbs imposed to curtail Covid-19. However, for Q4CY22 it has performed better than expectation (2.9% against estimate of 1.8%). Even industrial production (1.3% in Dec’22 against estimate of 0.2%), retail sales (-1.8% in Dec’22 against -8.6% estimate) and fixed asset investment (5.1% for CY22 against estimate of 5%) came in better than anticipated. Elsewhere, markets will closely monitor BoJ’s decision to mark a shift in their policy tomorrow.

Global equity indices closed mixed as investors kept a watchful eye on inflation and growth outlook ahead of the key data releases and the ongoing earnings season. Amongst other indices, Shanghai Comp gained (by 1%) the most followed by FTSE (0.2%). Sensex ended in red and was dragged down by losses in metal and auto stocks. However, it is trading higher today, while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies edged down. JPY depreciated by 0.6% even as investors expect BoJ to make changes to its ultra-dovish monetary policy. CNY too fell by 0.6%. INR depreciated by 0.3%, tracking weakness in CNY. Lower oil prices helped offset some losses. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed higher amidst hopes that the Fed may not be as aggressive as expected, amidst easing inflation in the US. Japan’s 10Y yield rose by 2bps and stayed above the BoJ’s target, increasing expectations of a tweak in its yield control curve in its policy. India’s 10Y yield rose by 2bps to 7.33% as investors remain jittery ahead of the Budget announcement. It is trading at 7.34% 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 is of 4 Jan 2023 and 5 Jan 2023

Global oil prices dipped marginally by 1% on the back of ample supply. OPEC and IEA monthly reports will offer guidance on demand and supply outlook.

Fig 7 – Commodities

BoJ in its widely anticipated meeting unanimously moved against the tide and continued with the ultra-low rates. It announced no new changes to yield curve control, against market expectation. Thus showcasing its intention to continue with large scale bond buying and to increase it on flexible basis. As a result, Japanese stocks climbed higher in morning session today. 10Y yield also edged upwards. Separately, Germany’s investor sentiment survey (Zew) moved in to the positive territory (16.9 against -23.3 in Dec’22) for the first time since Russia-Ukraine conflict signalling some improvement in Germany’s economic climate.

Global equity indices closed mixed as investors monitored policy makers in Davos voicing out concerns over global economic slowdown in CY23. Amongst other indices, Nikkei jumped the most followed by gains in Sensex (0.9%). Domestic market was supported by FII buying and strong gains in capital goods and power stocks. It is trading flat today while other Asian indices are trading higher. Japanese stocks surged by more than 2% after BoJ announced no new changes in the yield curve control policy.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies ended mixed. GBP rose by 0.8% as average weekly earnings rose more than expected suggesting that the BoE is unlikely to slow down the pace of rate hikes. On the other hand, EUR depreciated by 0.3% even as Germany’s Zew economic sentiment index turned positive unexpectedly. INR depreciated by 0.3% as oil prices rose. It is trading further weaker today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed broadly lower. US 10Y yield rose by 4bps as investors assess Fed’s future rate path. Germany’s 10Y yield fell the most by 8bps amidst news reports that the ECB may slow down the pace of rate hikes after a 50bps hike in Feb’23. 10Y yield in UK also dipped by 6bps. Japan’s 10Y yield was stable but remained above BoJ’s yields curve target. India’s 10Y yield closed flat. It is trading a tad lower 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│Note: Mutual funds data is of 4 Jan 2023 and 5 Jan 2023

Global oil prices rebounded yet again by 1.7% to US$ 85.9/bbl on expectation of improved demand outlook with reopening of China’s economy.

Fig 7 – Commodities

Macro data in the US pointed to slowdown in the economy. PPI data fell far more than anticipated (-0.5% from +0.2% in Nov'22 on MoM). Industrial production fell at the sharpest pace in 15-months (-0.7% from -0.6% in Nov'22). Adding to further woes was drop in US retail sales by 1.1% against expectation of -0.8%. Despite that Fed officials (Cleveland and St Louis Fed President) stated the need to continue with rate hike to combat inflation. They see the terminal rate settling above 5%.

Global indices ended mixed as investors monitored slew of data releases. UK CPI eased for the 2nd month in a row (10.5% in Dec against 10.7% in Nov'22). Disappointing data of US retail sales dragged down Dow Jones which fell by 1.8%. On the other hand, Nikkei jumped by 2.5% as BoJ continued with its ultra- low rates and made no new announcement. Sensex also ended in green led by gains in power, capital goods and IT stocks. However, it is trading lower today ahead of the F&O expiry day; while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except JPY (lower) and EUR (flat), other global currencies ended higher. DXY was broadly unchanged after US retail sales slumped in Dec'22. Fed officials reiterated the need for higher rates. JPY fell by 0.6% after BoJ defied market expectation of a change in its ultra-dovish policy. INR appreciated by 0.4%. It is trading stronger today as well, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except UK (stable) and China (tad higher), global 10Y yields closed lower. US 10Y yield fell by 18bps as all major macro prints such as retail sales, industrial production and producer price inflation showed slowdown. Even Japan’s 10Y yield fell by 10bps as BoJ went against market expectation of exiting from ultra- loose policy. India’s 10Y yield fell by 1bps. It is trading lower at 7.29% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

 Cut off yields for Tbill rose across the board (91, 182 and 364-days:+3, +4 and +1bps respectively).

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 is of 4 Jan 2023 and 5 Jan 2023

Global oil prices fell by 1.1% to US$ 85/bbl amidst slowdown fears in the US.

Fig 7 – Commodities

Signs of slowdown in US economy became more visible with dip in housing starts (1.38 mn, a 5-month low from 1.4 mn in Nov’22) and permits data, following disappointing retail sales and industrial production. On other hand, US labor market remains tight with weekly jobless claims falling below expectation. In the ‘Beige Book’ Fed noted that firms remain hesitant to lay off employees even as demand for goods and services have slowed down. Separately, China kept its benchmark rate unchanged at 3.65% (1-year LPR) and 5-year LPR at 4.3%. The rates were last revised in Aug’22. RBI in its monthly bulletin pointed that ’macroeconomic stability is getting bolstered with inflation brought under tolerance band’. In Japan inflation climbed to its highest level (4% in Dec’22) since 1981

Disappointing global data pulled most of the global indices lower. Rate hike concerns by Fed also kept investors worried. Amongst other indices, Nikkei (1.4%) dropped the most followed by losses in FTSE (1.1%) and Dow Jones (0.8%). Sensex (0.3%) too ended in red led by subdued global cues. It was further dragged down by power and consumer durable stocks. It is trading flat today, while other Asian indices are trading higher.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Except INR and CNY, other global currencies gained against the dollar. DXY fell by 0.3% as US housing sector continued to show signs of weakness (building permits and housing starts). EUR gained by 0.4% amidst hawkish comments from ECB President. INR depreciated by 0.1% as oil prices inched up. However, it is trading stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global 10Y yields closed mixed. US 10Y yield rose by 2bps as Fed officials batted for higher rates. Strong labour market data (fall in jobless claims) also supported investor sentiments. Germany’s 10Y yield also inched up by 4bps as ECB President stated that Central Bank is likely to continue raising rates. In India, 10Y yield fell marginally by 1bps. It is trading higher at 7.33% today ahead of Rs 28,000 crore weekly G-sec auction.

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 is of 4 Jan 2023 and 5 Jan 2023

Led by optimism around China and improved demand outlook, global oil prices climbed up by 1.4% to US$ 86.2/bbl.

Fig 7 – Commodities