Economic Weekly Wrap
25 October 2022 - 31 October 2022

Flash composite PMIs of UK (21-month low), Eurozone (23-month low) and US (2- month low) signal further moderation in economic activity. While in the US, manufacturing sector moderated, services activity was the major drag in UK. In the Eurozone, there was a broad-based slowdown, raising further fears of a recession. In Japan, composite PMI rose, led by an improvement in services sector even as manufacturing activity slipped. However, In China, GDP growth improved to 3.9% (YoY) in Q3CY22 (est. 3.3%) from 0.4% in Q2. Industrial production and exports too were better than expected, while retail sales remained sluggish. However, concerns over economic growth were reignited as the new government is likely to maintain the strict Covid-zero stance. End of political uncertainty in UK provided some relief.

Global indices closed mixed. Investors remained cautious monitoring political developments in China and UK and flash PMI prints in the US, UK and Germany. US Treasury Secretary reiterated concerns of ‘dangerous’ global backdrop. Even BoE Deputy Governor said that markets are still uncertain about the outlook of UK. In Asia, Hang Seng fell by 6.4% to its lowest level since Apr’09. Sensex on the other hand, rose by 0.9% in its truncated trading session yesterday. It is trading further higher today in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed against the dollar. DXY ended flat amidst a dip in US economic activity. JPY depreciated by 0.8%. CNY fell by 0.4% to a 14- year low as China unveiled its new leadership which raised concerns over economic growth. Following a further drop in CNY today, INR is trading lower.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Global yields closed mixed. US 10Y yield rose by 3bps as markets are awaiting another 75bps hike in the upcoming policy of Fed scheduled next week. UK’s 10Y yield fell the most by 31bps on hopes of fiscal consolidation from new PM. Germany’s 10Y yield fell by 9bps ahead of ECB policy meeting. India’s 10Y yield rose by 3bps (7.51%) and is trading lower at 7.46% 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 pertains to 16 and 17 May 2022

Crude oil prices edged down by 0.3% as data showed a drop in crude imports by China signalling a stress in demand.

Fig 7 – Commodities

US housing market showed signs of stress as high interest rates start to bite. US new home sales fell by 10.9% on a MoM basis, as the average 30-year fixed mortgage rate rose to a 20-year high. On the other hand, trade deficit widened sharply, due to a weakening export momentum. Rising concerns over growth have also led to expectations that the Fed may taper down the pace of rate hikes going forward. Elsewhere, Bank of Canada also slowed down its rate hike to 50bps versus expectation of a 75bps hike. Recent data showed worsening growth-inflation dynamics worldwide. While GDP growth in South Korea slowed down in Q3CY22, CPI inflation in Australia rose to a 32-year high in the same period.

Global equity indices closed mixed. S&P 500 dropped by 0.7% tracking weaker new home sales data. FTSE on the other hand, firmed up by 0.6% led by healthcare and basic metal stocks and also on expectation of fiscal consolidation from newly elected PM. Asian stocks closed higher led by gains in technology stocks and China’s new President’s declaration of a solid growth trajectory in the near term. Sensex fell by 0.5% in its last trading session. It is trading higher today, while Asian stocks are trading mixed.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies gained against the dollar. DXY fell by 1.1% as US home sales declined for the 8th straight month in Sep’22. GBP gained by 1.3% amidst increased expectations of a 100bps rate hike by BoE. EUR also gained 1.2%. In line with other Asian currencies, INR is trading stronger today.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (stable), global yields closed lower. US 10Y yield fell the most by 10bps as markets are expecting less aggressive pace of rate hike from Fed as macro indicators indicate growth slowdown. UK’s 10Y yield fell by 6bps amidst news reports that the Chancellor of the Exchequer is planning to fill a fiscal shortfall of US$ 41bn through spending cuts. India’s 10Y yield fell by 7bps (7.44%) tracking US 10Y yield. It is trading lower at 7.38% 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 pertains to 16 and 17 May 2022

Crude oil prices rose by 2.3% to US$ 95.7/bbl supported by a sharp pickup in US crude exports and a decline in dollar.

Fig 7 – Commodities

US GDP rose more than expected in Q3CY22 to 2.6% (est. +2.3%), ending two consecutive quarters of negative growth. The increase was attributed to an improvement in net exports, even as consumer spending remained weak. ECB increased rates by 75bps. It also said that “substantial progress” has already been made, suggesting that the pace of rate hikes may slow down. On the other hand, BoJ maintained its ultra-dovish policy stance while raising its inflation forecast upwards to 2.9% in FY2022 (from 2.3% earlier). Interestingly, CPI inflation in Tokyo surged to a 33-year high in Oct’22. In India, RBI announced a surprise MPC meet next week as inflation continues to hover above its mandate.

Global equity indices closed mixed monitoring policy decision of major central banks and macro data releases in US and Germany. S&P 500 fell by 0.6% as durable goods orders showed moderation. In Asian market, only Hang Seng rose by 0.7% supported by technology stocks. Sensex rose by 0.4% supported by real estate and metal stocks. It is trading higher today, while Asian stocks are trading lower following BoJ’s policy decision.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed against the dollar. DXY ended 0.8% higher supported by better than expected GDP data. EUR fell by 1.2% as investors expect a dovish pivot from the ECB. INR strengthened by 0.3% despite higher oil prices. It is trading further stronger today, in line with other Asian currencies.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan (stable), global yields closed lower. UK’s 10Y yield fell the most by 17bps amidst expectations of fiscal consolidation. Germany’s 10Y yield also fell by 15bps as ECB President said that “substantial progress” has already been made in withdrawing stimulus. India’s 10Y yield fell by 3bps (7.41%) tracking global yields. It is trading at 7.40% today.

Fig 3 – Bond 10Y yield

Source: Bloomberg, Bank of Baroda Research

In the Rs 220bn TBill auction, cut off yields for 91 days TBill rose by 4bps, while for 182 days and 364 days, it inched down by 2bps each.

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 pertains to 16 and 17 May 2022

Crude oil prices rose further by 1.3% supported by easing fears of recession.

Fig 7 – Commodities

Inflation in Europe indicates that prices continue to remain elevated in Oct’22 in both Germany (10.4% versus 10%) and France (6.2% versus 5.6%). On the brighter side, German economy did not contract as expected (-0.2%) and rose by 0.3% in Q3CY22 following 0.1% increase in Q2. France’s Q3 GDP was however lower at 0.2% from 0.5% in Q2. In US, consumer sentiment for Oct’22 inched marginally to 59.9 (est.: 59.6) from 59.8 in Sep’22 and investors are expecting another 75bps rate hike from Fed this week. Core PCE for Sep’22 while remaining elevated (6.2%), is expected to come down in the coming months as global commodity prices ease. China’s strict Covid-19 lockdown measures are dragging lower commodity prices and domestic manufacturing and services activities (official PMIs).

Global equities ended mixed. US stocks surged sharply as US core PCE index rose less than estimated, supporting views of a likely Fed pivot in Dec’22. On the other hand, Asian stocks ended mostly lower weighed down by Covid-19 flare ups in China and BoJ’s policy stance. Shanghai Comp fell sharply by 2.2%. Sensex bucked the weakness in its Asia peers and rose by 0.3%. Auto stocks led the gains. It is trading further higher today, in line with other Asian stocks.

Fig 1 – Stock markets

Source: Bloomberg, Bank of Baroda Research

Global currencies closed mixed against the dollar. DXY rose by 0.1% as investors await the Fed meeting. EUR closed flat supported by better than expected Q3CY22 GDP data from Germany. On the other hand, JPY fell by 0.9% after BoJ reiterated its ultra-dovish stance. INR closed flat. It is trading stronger today, while other Asian currencies are trading lower.

Fig 2 – Currencies

Source: Bloomberg, Bank of Baroda Research

Except Japan and China (lower), other global yields closed higher. 10Y yields in Germany (14bps), US (9bps) and UK (8bps) rose the most. Rate hike by ECB, possibility of similar rate hike by US Fed later in the week, sustained increase in inflation in Europe, and better than expected GDP prints, pushed sovereign yields higher. India’s 10Y yield was up a tad (1bps), awaiting RBI’s decision. It is trading further up at 7.43% 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 pertains to 16 and 17 May 2022

International oil prices fell by 1.2%, as China continues to impose stringent restrictions to curb Covid-19 cases in major cities.

Fig 7 – Commodities