The INR ended the week lower after posting gains in the last three consecutive weeks. The fall in INR is largely attributed to the gain in crude oil prices, which rallied by more than 6% last week. INR started the week higher on the back of trade talks between the US and China, which eases risk aversion amid expectation that both the countries will come to a common ground on trade. Further, the market participants also weighed the possibility of the Federal Reserve pausing interest rate hikes.
The first advance estimates of gross domestic product (GDP) for 2018-19, which showed the Indian economy is likely to grow at 7.2% in the current fiscal also kept the INR under pressure. (Read our analysis on GDP First Advance Estimates)
Going ahead in the week, crude oil prices continued to extend gains, raising concerns of higher inflation and fiscal slippage. The growing speculation that the government may soon come out with a package to support farmers also weighed on INR. INR depreciated by 1.08% against the USD last week and depreciated by 2.02% against the euro
USD ended the week lower against major world currencies amid progress in U.S.-china trade talk and due to the release of dovish federal reserve minutes for December. Further, during the week/ number of Fed officials including central bank governor Powell messages were clear that the U.S. economy is doing well right now but the weakness in the markets and the uncertainty abroad requires them to be patient with rate hikes. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.53% on a week on week basis and is at a level of 95.67.
USD started the week on lower note on Monday as comments from the Federal Reserve eased concerns over its policy tightening and the start of a fresh round of U.S.-China trade talks boosted risk appetite. However, USD recovered mildly on Friday paring some of its losses after the release of inflation data which came in as expected.
The minutes released from the Fed’s December meeting on Wednesday showed that many policymakers are in favour of rates staying steady this year, increasing expectations that there will be no hikes in 2019.
China’s Commerce Ministry on Thursday said that the trade talks with the U.S. that ended on Wednesday were extensive and detailed, and that both sides agreed to continue to keep in close contact. The U.S. side also issued a statement that China had pledged to purchase “a substantial amount of agricultural, energy, manufactured goods, and other products and services from the United States.”
Federal Reserve President Jon Bostic said at an event in Tennessee that the hike in December most likely increases rates to neutral and the Fed needs to be patient and get better insight on economic risks. While Chicago Fed President Charles Evans said the Fed can afford to take a wait-and-see approach to future policy but added that rates could move higher if “downside risks dissipate.”
Further on Thursday, Federal Reserve Chairman Jerome Powell delivered a mixed message on monetary policy, stressing that the central bank will be “patient,” on rates, but renewed worries that its balance sheet trimming was on autopilot. Powell added that the Fed’s balance sheet will be “substantially smaller,” indicating the central bank will press ahead with its balance sheet wind-down operation, which peaked at roughly USD 4.5 trillion in Jan 2015, but has now narrowed to about USD 4 trillion.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields rose by 2 bps as risk aversion eased after Jerome Powell said that the Fed plans to evaluate the health of the economy before moving ahead with any new interest rate increases. Powell said we can be patient and watch patiently and carefully how the economy evolves.
Minutes from the Federal Open Market Committee meeting also suggested that several officials from the rate-setting group had pushed for the central bank to pause its hiking campaign, citing the tepid inflation environment. The minutes also showed officials urging for a more cautious approach when raising rates in 2019, even as they voted to hike the Fed’s benchmark interest rate in December.
Japan 10-year benchmark bond yields rose by 6 bps after BOJ quarterly survey on people livelihood showed the percentage anticipating higher inflation increased. Signs of a pickup in inflation expectations may offer some hope to the Bank of Japan that consumer prices will inch toward its 2% inflation target
Germany 10-year benchmark bond yields fell by 4 bps towards recent two-year lows as soft economic data boosted demand for haven assets. France industrial production fell more than expected in November which added to worries that the Eurozone second-largest economy is faltering. Germany imports fell unexpectedly in November, outstripping a drop-in exports and widening the trade surplus, in a further sign that Europe’s largest economy is likely to post meager growth in the fourth quarter of 2018
Italy 10-year benchmark bond yields fell by 7 bps, Portugal 10-year benchmark bond yields fell by 13 bps, Greece 10-year benchmark bond yields fell by 11 bps, Spain 10-year benchmark bond yields fell by 4 bps.
Emerging economies 10-year benchmark bond yields largely fell last week.
China 10-year benchmark bond yields fell by 4 bps after PBoC loosened its monetary policy in a bid to avoid a sharp economic slowdown. PBoC said that it would cut banks reserve requirements by 100 bps in two stages on 15th and 25th Jan, releasing a net 800 billion yuan ($116.61 billion) for new lending.
South Africa 10-year benchmark bond yields fell by 3 bps. South African business confidence dipped in December on lower exports, fewer new vehicle sales and a decline in planned construction. The South African Chamber of Commerce and Industry’s (SACCI) monthly business confidence index (BCI) fell to 95.2 in December from 96.1 in November.
Russia 10-year benchmark bond yields fell by 30 bps. Australia 10-year benchmark bond yields fell by 5 bps, Brazil 10-year benchmark bond yields rose by 9 bps, Indonesia 10-year benchmark bond yields fell by 12 bps.
US high-yield bond yields fell by 76 bps to 7.13% and Eurozone high-yield bond yields fell by 19 bps to 4.59%.