Economic Weekly Wrap
19 December 2022 - 23 December 2022

Fears of global economic slowdown resurfaced to the shore once again after global Central Banks kept their foot firm on the rate hike pedal; as they signalled more hikes are in the offing than was initially anticipated. Furthermore, other indicators such as moderation in flash global US PMI and retail sales added to the woes. As a result, corrections was seen across equity markets. Oil prices also dipped lower. Though, higher PMI (48.8 vs 47.8) for Europe offered some solace. This week, market will keenly await BoJ’s rate decision, US Michigan Consumer sentiment and durable good orders. RBA and RBI’s minutes will also be monitored.

Apart from Hang Seng and Shanghai Comp (flat), other global equity indices suffered losses as fears surmounted around global growth after Central bank’s hawkish tone. Nikkei (1.9%) ended in deep red, amongst other indices followed by FTSE (1.3%). Sensex also fell by 0.7%, led by subdued global cues. It was dragged down further by realty and cap good stocks. Weekly expiry of F&O contracts also impacted the market. However, it is trading higher today while other Asian stocks are trading lower.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring JPY (higher) and CNY (flat), other global currencies ended lower. DXY rose by 0.1% as risk appetite of investors weakened. Hawkish comments from major central banks (Fed, ECB and BoE) has resurfaced fears surrounding global recession. As a result, EUR and GBP fell the most. INR too depreciated by 0.1%, despite fall in oil prices. It is trading stronger today, while other Asian currencies are trading mixed.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan and China (flat), other global bond yields closed higher. 10Y yields in UK (9bps), Germany (7bps) and US (4bps) rose the most. As global central banks (Fed, ECB, BoE) have indicated that rates will remain elevated for a foreseeable period, risks to recession have increased. US economy is already showing signs of slowdown (retail sales, PMI). India’s 10Y yield rose by 1bps. However, it is trading lower at 7.28% 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 Nov 2022 and 28 Nov 2022

Crude oil prices fell by 2.7% to US$ 79/bbl, amidst news of possible slowdown in global growth with Central Banks across the globe signalling hawkish tone.

Fig 7 – Commodities

Growing risk of recession continued to weigh in on investors as they began the pre- holiday week with early signs of economic softness adding to the negative sentiments. China begins to reopen the economy fraught with hopes of revival, though this was outweighed by uncertainty as cases continued to surge. Reserve Bank of Australia in its minutes highlighted considering variety of options including pausing rate hikes but noted the importance of ‘acting consistently’ in its Dec’22 meeting. Bank of Japan while holding rates steady today, widened its yield curve control band to 0.5% as its upper limit (from 0.25% upper limit earlier).

Barring FTSE and Sensex, other global indices ended in red as investors’ monitored reopening of China’s economy and likelihood of elevated rates in the US for a longer period. Shanghai Comp (1.9%) dropped the most, followed by Nikkei (1.1%). On the other hand, Sensex ended higher and was supported by gains in auto and power stocks. However, it is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed. While EUR and INR gained, GBP was flat and JPY and CNY depreciated. DXY closed flat. Risk appetite of investors improved as Germany’s Ifo sentiment index rose for the 3rd consecutive month and was higher than estimated. China’s easing Covid-19 restrictions also helped. Today, JPY is trading stronger following BoJ’s decision to widen yield target range. On the other hand, INR is trading lower today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (flat) and China (lower), other global bond yields closed higher. 10Y yields in UK (17bps—at ~5 week high), US (10bps) and Germany (5bps) rose the most. Hawkish comments of global central banks continue to impact investor sentiments. Elevated rates for a longer duration of time is casting concerns over the economic outlook as well. India’s 10Y yield rose by 2bps following global cues and is trading further higher at 7.33% 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

Crude oil prices inched up by 1% to US$ 79.8/bbl as news of reopening of China’s economy lifted investor sentiments on hopes of demand revival.

Fig 7 – Commodities

Finally leaving the divergence path, BoJ joined the wagon along with other global central banks after it shocked the global market by widening the long term yield control thereby allowing long term rates to rise more. As a result, Bond yields surged multi-year high. Data releases scheduled this week, such as US GDP for Q3, jobs data and consumer spending will drive the market. On the domestic front, RBI in the monthly bulletin stated inflation has eased ‘but is certainly not out’ and also warned of risks to global growth in the coming year.

Global indices ended mixed as investors’ continued to monitor interest rate outlook and BoJ made surprise changes to its yield curve control tolerance. US and UK indices traded in green, while Nikkei (2.5%) dropped the most followed by Hang Seng (1.3%). Sensex also ended in red and was dragged down by losses in auto and metal stocks. However, it is trading higher today while other Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring INR (lower), other currencies gained against the dollar. JPY appreciated the most, followed by GBP and CNY. DXY fell by 0.7%. While JPY was supported by central bank action, EUR and GBP gained on account of improving business morale in Germany. INR on the other hand depreciated by 0.1% as oil prices gained marginally. However, it is trading higher today, while other Asian currencies are trading lower.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except India (flat), other global bond yields closed higher. 10Y yields in Japan (15bps—multi-year high), Germany (10bps) and US (10bps) rose the most. BoJ surprised the markets by announcing widening of the yield target band (between -0.5% and +0.5%) and increasing monthly bond buying program to ¥ 9tn from ¥ 7.3tn earlier, thus leading to a sell-off in global bonds on the longer-end. India’s yield remained unchanged, and is trading flat even 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 7 Dec 2022 and 8 Dec 2022

Crude oil prices edged up by 0.2% to US$ 80/bbl after dip in US crude oil inventories and weakness in dollar index. Gold prices continued to trade higher.

Fig 7 – Commodities

Global market digested mixed news of upbeat US consumer confidence, corporate earnings and subdued home sales data. On domestic front, RBI governor warned of the possibility of the next financial crisis coming in from private cryptocurrencies and noted the need of strict prohibition. Recently, FTX one of the largest cryptocurrency exchange had also collapsed. Aluminium prices inched up and are likely to remain elevated in short term amidst news of Indonesia (major exporter) considering bauxite ban. Market will monitor Indonesia’s rate decision today.

Global indices ended mixed. Nikkei continued to trade in losses for the 2nd straight day after BoJ’s policy tweak. US indices registered strong gains on the back of improvement in consumer confidence (8-month high in Dec’22). On the other hand, Sensex ended in red with India’s VIX jumping by 13% as fears of Covid-19 cases resurfaced. Power and oil & gas stocks suffered the most. 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 fell across board, with GBP (-0.8%) and JPY (-0.6%) depreciating the most. DXY rose by 0.2%. JPY witnessed some correction and was also moved by thin liquidity during the holiday season. GBP reacted to data on government borrowings in Nov’22. INR too fell by 0.1%, as crude prices inched further up. 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. While 10Y yields rose the most in Japan and Germany, they were down in US in and UK. Japan’s 10Y yield was up by another 7bps, reacting to BoJ’s change in yield target, while investors in Germany are cautious over amount of public spending required in CY23. On the other hand, higher government borrowings in the UK and dip in existing home sales in the US, have raised alarm bells in these economies. Investors are hoping for an early pause by Fed in CY23. India’s yield fell by 1bps, but is trading a tad higher at 7.30% 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 7 Dec 2022 and 8 Dec 2022

Crude oil prices rose by 2.8% to US$ 82/bbl led by drawdown in US crude stocks. Relaxation of Covid-19 norms in China further pushed prices up.

Fig 7 – Commodities

Robust economic data from the US including revision of US GDP for Q3CY22 upwards, lower jobless claims raised likelihood of more rate hikes by Fed. Investors have also begun to contest the possibility of ‘hard landing’. Resurgence of Covid-19 cases in China fuelled fears of global slowdown. Against this, hopes of ‘Santa Claus rally’ also faded. Most of equity indices had ended lower. On domestic front, RBI also highlighted premature pausing of the rates would be costly error at the current juncture as inflation continues to remain a concern.

Barring Nikkei and Hang Seng, other global indices ended in a sea of red. S&P 500 dropped the most as investors feared that Fed will continue to hike rate more than anticipated as economy is showing signs of resilience (US GDP revised upwards, lower jobless claims). Sensex too ended in red led by subdued global cues, hawkish commentary from MPC minutes. Capital goods and power stocks dragged down the indices further. It is trading lower today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Barring JPY and INR (higher), other global currencies fell, with GBP (-0.4%) taking the lead. DXY rose by 0.3%. Less than estimated increase in US jobless claims has raised concerns that Fed will maintain elevated rates for a longer duration. GBP was impacted by more than expected decline in Q3CY22 GDP data. INR on the other hand rose by 0.1%, as oil prices fell. However, it is trading lower today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan and China (lower), 10Y yields elsewhere closed higher. Germany’s 10Y yield rose the most (+5bps), followed by US and UK (+2bps each). Tight labour market conditions in the US is making investors believe that Fed will remain hawkish for a while now. Following global cues and ahead of the weekly RBI auction today, India’s yield rose by 3bps. It is trading further higher 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 as of 7 Dec 2022 and 8 Dec 2022

Crude oil prices edged lower by 1.5% to US$ 81/bbl amidst news resurgence of Covid-19 cases in China and concerns around Arctic storm across US.

Fig 7 – Commodities