Economic Weekly Wrap
29 January 2024 - 02 February 2024

US GDP in Q4CY23 expanded by 3.3%, beating expectation of 2% growth, but slowing from 4.9% in Q3. The sharper than estimated jump was driven by consumption (PCE was up by 2.8%, broadly stable compared to previous quarter). Other components such as increase in state and federal spending and gross private investment also helped beat expectations. Thus, CY23 growth clocked in at 2.5% versus 1.9% in CY22. However, inflationary pressures remain under control, with core PCE deflator rising by 2.9% in Dec’23 versus est. 3% and slowing from 3.2% in Nov’23. Investors are now expecting 47% probability of rate cut in Mar’24. In Europe, as ECB maintains that rate cut talks are “premature”, pessimistic business outlook in Germany is back. The Ifo index fell to 85.2 in Jan’24 from 86.3 in Dec’23 as participants brace for stagnation to shallow recession in the economy.

Global indices closed mixed. Moderation in consumer inflation in US raised hopes of possible rate cuts by Fed. Dow Jones ended in green. FTSE too climbed higher (1.4%) led by strong gains in household goods stocks and ahead of the rate decision. Sensex is trading higher ahead of the announcements from the Economic Survey and Interim budget. Asian indices are also trading higher with gains in Hong Kong market after news of liquidation order of a firm.

Global currencies ended mixed. DXY fell by 0.5% as investors await the policy decision by Fed. Investors have priced in a 47% chance of a rate cut in Mar’24 from 86% chance seen in Dec’23. INR is trading weaker today, while other Asian currencies are trading mixed.

Global yields closed mixed. US 10Y yield was up by 2bps as the economy continues to show signs of resilience (GDP). In the UK, markets await BoE decision due this week. India’s 10Y yield closed a tad lower by 1bps, even as oil prices rose. It is trading flat today, awaiting cues from the Union Budget presentation this week.

Oil prices inched up, owing to supply side concerns (Red sea attacks).

As US Fed begins its 2-day meeting today, it is largely expected to keep policy rates on hold. Investors will also look for guidance on timing of future rate cuts, as growth is easing slower than anticipated. Slew of other economic data points pertaining to labour market, manufacturing and services activity index, will also shed light on direction of US rates. Separately, similar economic strength is not currently visible in other major economies. For instance, in China, industrial profits fell by (-) 2.3% in CY23, following (-) 4.4% decline between Jan-Nov’23. In Australia, retail sales in Dec’23 fell by (-) 2.3% (MoM), after posting 1.6% increase in Nov’23. Most significant decline was noted in discretionary spending (mainly household items). Only sales of food recorded an increase in Dec’23.

Barring FSTE (flat) and Shanghai Comp (lower), other global indices closed higher. US indices ended in green ahead of key economic reports including the jobs report and Fed rate decision. Gain in technology stocks provided further support. Sensex rebounded led by sharp gains in oil & gas and power stocks. However, it is trading lower today while other Asian indices are trading higher.

Global currencies ended mixed. DXY gained by 0.2% awaiting Fed’s rate decision and series of economic reports. GBP held steady ahead of BoE’s decision. ECB closed lower amidst dovish commentary by ECB officials. INR is trading flat today, while other Asian currencies are trading mixed.

Except Japan and India, other global yields closed lower. 10Y yields in UK, US and Germany fell the most. Investors reacted to weak macro data from Europe (Germany Ifo) and more than expected dip in Dallas Fed manufacturing index. They also await Fed’s rate decision. India’s 10Y yield closed broadly flat, as oil prices eased. It is trading a tad lower today at 7.16%.

Oil prices fell as US$ strengthened, and outweighed supply side concerns.

IMF has revised its global growth projections upward for CY24 to 3.1% (+0.2% from Oct’23 projection) and expects 3.2% growth in CY25. The revision is on account of resilience witnessed in US growth and fiscal support announced in China. US GDP forecast for CY24 has been revised up from 1.5% (Oct’23 projection) to 2.1%. China is expected to clock in 4.6% (4.2% earlier) growth in CY24. Even for India, the Fund now expects FY25 growth at 6.5% versus 6.3% earlier. In US, high frequency data such as JOLTS data reaffirms Fund’s views. Job openings in Jan’24 rose to 9.03mn, up from 8.93mn in Dec’23. Even conference board consumer sentiment index ticked up to 114.8 in Jan’24 (highest since Dec’21) from 108 last month. All eyes are now on Fed’s rate guidance due later today.

Global indices closed mixed. US indices ended higher as investors’ monitored unexpected rise in the jobs opening (JOLTS report). This signals resilient labour make and gives room to Fed to continue with higher rates. Sensex ended in red and was dragged down by losses in consumer durable and capital good stocks. It is trading higher today, while other Asian indices are trading lower.

Except UK and Germany, other global yields closed lower. Investors digest mixed bag of Euro Area’s GDP data, and also await Fed’s rate decision, which is due shortly. India’s 10Y yield fell a tad by 1bps, even as oil prices increased. It is trading even lower at 7.15% today.

Oil prices inched up, as supply side risks owing to geopolitical uncertainty remain high and IMF raised global growth forecasts.

In line with market expectations, US Fed decided to keep the policy rates unchanged in Jan’24. Fed Chair Powell hinted that it was too early for Fed to begin cuts from Mar’24 onwards. However, the statement confirmed that rates have reached their peak and dialling back will begin from this year. US labour market is showing signs of soft landing as ADP data shows that private payrolls in Jan’24 rose by 107k (est.: 150k), versus 158k increase in Dec’23. Separately, cooling inflation print in Eurozone (France and Germany) has revived hopes of ECB cutting rates in its Apr’24 meeting. Further improving global growth prospects, China’s manufacturing activity contracted at a slightly slower pace in Jan’24 (49.2 versus 49 in Dec’23), and non-manufacturing activity improved (50.7 versus 50.4). Domestically, core sector growth in Dec’23 eased to 3.8%, at its lowest in FYTD24 so far

Barring Nikkei and Sensex, other global indices closed lower. US indices ended in red as investors monitored Fed’s rate decision. Probability of rate cuts has now pushed back to May-Jun’24. Sensex gained by 0.9%, led by gains in real estate and auto stocks. It is trading further higher today, in line with other Asian indices.

Except Japan, other global yields closed sharply lower. 10Y yields in US and Europe fell the most, following Fed’s rate decision. The central bank admitted that rates are at its peak currently and depending upon incoming data it may begin rate cuts this year. India’s 10Y yield fell by 1bps, as oil prices also inched down. It is trading even lower at 7.13% today.

Oil prices fell by 1.4%, on account of bearish demand outlook.

Bank of England kept its policy rates on hold, by a split vote. Notably, BoE has effectively ruled out further rate hikes, a stance it has maintained in its last meetings. Separately, US ISM manufacturing PMI improved more than expected to 49.1 (est. 47.0) from 47.1 In Dec’23, led by a sharp rebound in orders. On the other hand, jobless claims rose by 9,000 to 224,000 (est. 211,000), suggesting some softness in the labour market. In the Eurozone, CPI inflation inched down to 2.8% from 2.9% in Dec’23, in line with expectations. Core inflation moderated to 3.3% in Jan’24, lower than market estimates of 3.2%. In India, Interim Union Budget for FY25 reiterated the government’s commitment to fiscal prudence with the fiscal deficit target for FY25 being sharply reduced to 5.1%. Higher capex spending, coupled with lower borrowing target for FY25 will be positive for investor sentiments

Global markets closed mixed. An interplay of factors such as timing of Fed rate cut, labour market in the US and mixed PMI readings, impacted investor sentiments. Dow Jones and S&P 500 were supported by robust earnings of major technology companies. Sensex fell by 0.1%, led by losses in metal and consumer durable stocks. It is trading higher today, while Asian stocks are trading mixed.

Except China (stable), global yields closed lower. UK’s 10Y yield fell the most followed by US and Japan. Investors have priced in easing financial conditions and it is reflected in the holding of sovereign securities. Germany’s yield softened amidst easing inflation in the Eurozone. India’s 10Y yield fell by 9bps as fiscal prudence is maintained. It is trading further lower at 7.04% today.

Oil prices softened amidst expectations of softening demand conditions.