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- Major underlying rates could rise in near future in US says Christopher Waller one of the most influential voices. Not the policy rates though but the R-star rate, the supposed level of interest rates that neither stimulates nor restricts economy and leaves inflation anchored at Fed’s target pace
- It’s the economic resilience that’s going to cause the R-star rate to continue to remain high and even move higher. Though the number is always uncertain it is seen as a tool that helps assess the impact of monetary policy
- More and more investment banking firms are coming out and sharing their view that a September rate cut is on cards. There is a 45% chance that Fed may cut in September as the market is gauging – when all signals are indicating a recession how is it that the economy is not getting into one
- Somewhere the wall street is discounting a cut soon and that’s the reason it’s holding firm. After a day’s loss Dow was trading higher by 50 points at the time of finalizing this write up. S&P is trading above 5300 mark and after having returned 16% a year since 2019 the question is – for how long is the steam left and can the fear of recession put some brakes on index
- Dollar index and Gold are swinging with the news. On a day the chances of a rate cut look bleak the dollar index drops and on the day it looks the rate cut is on the anvil Gold tends to celebrate. DXY ended lower at 104.60 while Gold was almost flat at USD 2335 but it looks like this will act as a new bottom. US treasuries were flat
- Politically equations are changing in the US as Nikki Haley has also decided now to back Trump, though she may not get to be a running mate for the temperamental tycoon. In the meanwhile the ground is being prepared by Trump both legally and on the street
- Coming to India after officially scaling the 23k mark nifty ended almost flat, down only 10 pts from previous day close. I can take credit for one more prediction today. Post assembly poll outcome I’d stated in my write ups that before elections are over we may get to see 23k on index and today that has come true
- But what from here on? I think there is no harm in taking a breather and sitting light as we are into the last week before polling and on the day 1 of June we will have the exit polls. Though the outcome is known but markets are expected to normalize after initial burst out only because the market has ignored some macro factors that will start coming into play effective June mid. Current vix in India is above 20 while the same in US is around 13, imagine
- On to g-sec market, the 10y continued to trade marginally below the 7.00% mark with reasonable volumes as the market is drawing comfort from fiscal support that will set in with exceptional dividend. Another noticeable point – during FY 2025 till date the gross borrowing is ~ 18% lower than previous year however the net borrowing is 20% higher, a clear indication that in the same period last year there were high amount of redemptions as well. Even the states have borrowed lower than last year
- Government of India has borrowed INR 290.00 bn through issuance of 3/15/50 yr paper at a cut off of 7.02/7.04/7.15% respectively. The cut off in 50y paper is a bit on aggressive side more particularly due to limited supply but I’m surprised on the need for issuance of a 3y paper. Why disturb the ALM or is it that in another 3y the government expects another windfall gain and this is to cover temporary mismatch
- Going through weekly statistical supplement it’s evident that FX reserves are once again close to USD 650 bn and this reminds me of Dr. Subba Rao’s confession that during the period of strength in 2011-12 he didn’t go aggressively to build up the FX reserves the fallout of which was felt in 2013 – 14 taper tantrums, in a way highlighting what role the healthy FX reserves play for the country
- Bank credit growth at 15.9% and Deposit growth at 13.0%. Facing competition from alternatives, Deposits are not growing at a desired pace and given the strong consumer demand the credit off take is not cooling off. In fact this is reason enough for expecting a contrarian move on rates with g-sec rates coming off but the deposit and lending rates anticipated to remain elevated for the time being
- Closing remarks – off the cuff – I’m going to stand in queue while I roll out this message as I go to get my finger inked today. I know mobiles are not allowed within the polling booth but for sure in queues one can hold them to spend their time. As I’ve to discharge my national duty, I will take a ‘lotus’ in my ‘hand’ to vote either for an independent or NOTA but for sure I will go and press the button and assure that there will be no selfie uploaded. After all exercising my right to vote is my duty to be discharged and not to tom tom about
Stay safe, stay healthy, God bless you all, have a great day !!
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Vikas Miglani writes 