Economic Weekly Wrap
18 December 2023 - 22 December 2023

Global markets closely tracked rate decisions by major central banks. Moreover, comments by New York Fed official against the expectations of rate cut impacted investors sentiments after dovish commentary by Fed. Additionally, US flash composite PMI edged up to 5-month high of 51 in Dec’23 from 50.7 in Nov’23 led by expansion in services sector. However, manufacturing PMI moderated to 48.2 (49.4 in Nov’23) due to declining orders. Separately, moving on a divergent path from US Fed, Bank of Canada officials in their recent comments highlighted ‘it is still too early’ to ease monetary policy. This week the focus will turn towards BoJ and inflation rate from Japan.

Global indices ended mixed following key decisions by major central banks. Dow Jones climbed higher supported by strong economic data print (flash services PMI, factory output). Amongst other indices, Hang Seng surged the most. Sensex scaled a new peak supported by gain in IT and metal stocks. However, it is trading lower today, in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR (higher), other global currencies ended lower against the dollar. DXY rose by 0.6%, mainly due to correction in other basket currencies. EUR and GBP fell the most, as macro indicators suggest that respective economies are heading towards deeper downturn in economic activity. INR is trading stronger today while other Asian currencies are trading lower.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan, other global yields continued to slide down. 10Y yields in UK and Germany fell the most. Investors are pricing in rate cuts by central banks from mid next year, as economies face risk of recession (UK, Eurozone). India’s 10Y yield also fell, due to strong demand at weekly auction and following RBI’s announcement of VRR instead of OMO sale. It is trading at 7.17% 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, Mutual fund data as of 11 Dec and 12 Dec 2023

 Oil prices remain subdued, as major economies are gradually showing of signs of stress in their economic activities.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Amidst the ongoing uncertainty in the global markets, BoJ continued with the ultraloose monetary policy as the members unanimously agreed to keep the rates at - 0.1% mark and also continued with the yield curve policy. Separately, RBA in its minutes noted that the members had even considered hiking rates due to expectations that inflation will remain above the 2% threshold for longer period. However, the decision to eventually stick to pause was based on weaker consumption demand and limiting data. In the coming week, markets will track final US GDP print for Q3CY23 and a report on PCE given the recent comments by Fed.

Global indices ended mixed. Investors closely monitored Fed’s commentary with officials stating that there has been no guidance in terms of timings for rate cuts. S&P 500 and FTSE advanced by 0.5% each. On the other hand, Hang Seng dropped the most followed by losses in Nikkei. Sensex too ended in red and was dragged down by real estate and banking stocks. However, it is trading lower today, while other Asian markets are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except yields in Asia, other global yields inched up. 10Y yield in Germany rose the most, as ECB officials hinted that talks of rate cuts are still “premature”, thus watering down hopes of a rate cut by Mar’24. Investors are also re-assessing timing of Fed rate cut following statements made by some Fed officials. India’s 10Y yield ended flat, and even today it is trading broadly unchanged (7.17%).

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

Oil prices rose as major shipping firms announced to avoid the Red Sea route in the wake of pirate attacks. This could in turn lead to lead supply side pressures.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

The dovish pivot by Fed raised the expectations (67.5% chance) of a possible rate cut by as early as Mar’24. This comes in the wake of the PCE report scheduled to release later this week. On data front, sales of new single family home surged to 1.5 year high at 18% in Nov’23. In forex market, Yen declined amidst a dovish policy by BoJ. Separately, PBoC for the 4th time in a row has kept the interest rate unchanged with the one-year rate for household and corporate at 3.45% and 5-year benchmark rate at 4.2% for mortgages. On the domestic front, RBI has tightened norms for lenders towards their investment in alternative investment funds

Except Hang Seng, other global indices ended higher. Investors monitored commentary by Fed officials ahead of the key inflation data. Nikkei surged to a record high after the BoJ continued with its ultra-loose-monetary policy decision. Amidst the decision to keep the rate unchanged by PBoC, Shanghai Comp edged up marginally. Sensex advanced to fresh record high, supported by gains in oil and gas stocks. It is trading higher today, in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

 Barring JPY and INR (lower), other global currencies ended higher against the dollar. DXY fell by 0.4%, as investors attach a higher probability to rate cut by Fed in Mar’24. JPY fell the most (-0.7%) as BoJ continued to sound dovish in its latest remarks. INR fell by 0.1%, eyeing build-up in oil prices. However, it is trading higher today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed, with 10Y yields in US and China ending flat, and falling across Germany and Japan. Eurozone’s worries have risen as global supply chains are expected to again come under pressure, thus hampering external trade. BoJ’s dovish stance impacted its sovereign yield. India’s 10Y yield rose by 2bps, as oil prices were up. It is trading further higher 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 fund data as of 14 Dec 2023 and 15 Dec 2023

Oil prices rose by 1.6%, as tensions in Red Sea continue to build up, thus leading to possible disruptions in global supply chains.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Ahead of the release of key US GDP print and PCE report, economic data continued to show resilience with consumer confidence jumping to a 5-month high of 110.7 in Dec’23 driven by optimism of current and future business conditions. On the domestic front, RBI in its monthly bulletin highlighted global growth remains fragile and is expected to slowdown in FY24. The disinflation across geographies will also lead the way for interest rate reduction. India is expected to grow at 7% for FY24 while inflation is projected at 5.4% with risks evenly balanced. It was also noted that the risk of stagflation in the country is as low as 1%.

Global indices closed mixed, with markets in Japan, UK and Hong Kong ending higher and others ending in red. Investors in the US rebalanced portfolios, awaiting US PCE data, due tomorrow. FTSE rose to 3-month high as UK’s inflation report pushed chance of rate cut by BoE in Mar’24 to 50%. Sensex fell from its record high, dragged by power, metal and capital good stocks. It is trading further lower today, in line with other Asian markets.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring JPY (higher) and INR (flat), other global currencies ended lower against the dollar. DXY rose by 0.2%. GBP fell the most as lower than expected UK CPI (lowest in 2 years) has added fuel to speculations of rate cut by BoE in Mar’24. INR ended flat, despite rise in oil prices. However, it is trading lower today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

 Except China (flat), other global yields closed lower, with significant decline noted in UK, US (lowest since Jul’23) and Japan’s 10Y yields. Despite better than expected macro data from the US investors are still pricing in a rate cut by Fed in Mar’24. Dip in UK’s CPI has also steered hopes of an early rate cut by BoE. India’s 10Y yield fell by 1bps, and is trading further lower 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, Mutual fund data as of 15 Dec 2023 and 18 Dec 2023

Oil prices rose a tad, as supply-side tensions in Red Sea were offset by build-up of crude oil stocks in the US.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research

Economic data from the US fuelled expectations of monetary easing by Fed with investors pricing in a 71.3% likelihood of 25bps rate cut as per FEDWATCH tool. US GDP for Q3 was up by 4.9% much lower than expectations (5.2%). Additionally, US jobless claims also inched up to 205,000 for the week ending Dec 16. However, they continue to remain historically lower. The focus will now turn towards upcoming PCE report to offer more guidance on inflation movement. Separately, the BoJ minutes noted that members discussed on better communicating the policy stance (including the YCC) in order to avoid any speculation. Furthermore, inflation rate in Japan slowed down to its lowest level (since Jul’22) at 2.8% in Nov’23 (3.3% in Oct’23).

Barring FTSE and Nikkei other global indices closed higher. US indices rose led by gains in stocks of semiconductor and ahead of the release of inflation data. Investors will closely track the ‘Santa clause rally’ (gains on final 5-trading days) which has historically signalled market movement for the coming days. Sensex recovered and climbed higher led by strong gains in power and oil & gas stocks. However, it is trading flat today, while other Asian markets are trading higher.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR (lower) and China (flat), other global currencies ended higher against the dollar. DXY fell by 0.6%, as labour market showed signs of cooling (jobless claims), giving wind to expectation of rate cut by Fed in Mar’24. EUR and JPY gained the most. INR ended flat, eyeing stickiness in oil prices. However, it is trading higher today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. Varied signals from the US (softer than expected Q3 GDP and jobless claims; improving home sales, consumer confidence), has impacted investor sentiments. Market participants now await core PCE data for more cues on Fed’s rate trajectory. India’s 10Y yield rose by 2bps, as oil prices hover around US$ 79/bbl. However 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 fund data as of 18 Dec 2023 and 19 Dec 2023

Oil prices fell a tad, following the news of Angola exiting OPEC group.

Fig 7 – Commodities

Source: Bloomberg, Bank of Baroda Research