The INR remained rangebound throughout the week against the USD but ended the week lower as concerns related to fiscal slippage weighed on the sentiment after the interim budget unveiled some big populist measures ahead of the general elections. The interim budget pegs fiscal deficit slipping by 10 bps to 3.4% for the current year, owing to an income support scheme for farmers and expects it to stay at the same level in FY20 as well.
Further, the global credit rating agency Moody’s said that the inability to meet fiscal deficit target for four consecutive years is a big “credit negative” for the sovereign. INR depreciated by 0.12% against the USD last week and depreciated by 1.12% against the euro.
USD ended the week lower against major world currencies despite the release of better than expected U.S. monthly jobs report and accelerating manufacturing activity as the change in the Federal Reserve’s monetary policy statement was significant enough to keep the USD under pressure. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.22% on a week on week basis and is at a level of 95.58.
Report shows that the U.S. nonfarm payrolls grew by 304,000 in the month of January, up from 222,000 reported in December. The gain was well above the expectation of 165,000. The unemployment rate unexpectedly ticked higher to 4% in January from 3.9% in December. Meanwhile, average hourly earnings slowed to a rate of 0.1%, below expectations for a 0.3% rise.
USD came under sharp selling pressure on Wednesday after the Federal Reserve left interest rates unchanged and vowed to keep the brakes on further rate hikes amid concerns about slowing growth and subdued inflation. The central bank ditched its preference to continue with “gradual” rate hikes, saying it can hold off on monetary policy tightening following a slowdown in global growth and muted inflation pressures.
Fed said that “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,”.
Last week, the biggest loser was the British Pound, which extended its slide on the back of weaker manufacturing activity. British Pound depreciated by 0.89% against the USD. The PMI index dropped to 52.8 from 54.2 and there’s been no new Brexit developments – Theresa May refuses to rule out a no-deal Brexit and has not requested to extend Article 50.
Euro ended the week higher but remained under pressure after the release of weak economic data. However, the sharp fall in USD after Fed FOMC meet helped euro to gain, but the data released shows that the inflation is falling according to the latest German CPI report; retail sales in Germany fell by the largest amount in 11 years and confidence is down across the region.
Further, the ECB President Draghi feels that the risks have moved to the downside and last week, ECB member Weidmann said growth in 2019 could be well below 1.5% and inflation could be noticeably lower. He expects bad news from the economy to continue for a while as uncertainty remains high.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 8 bps to 2.67%, and prices extended their rally, as market turned bullish after the outcome of a Federal Reserve meeting that signalled a pause in rate hikes. Federal Reserve said it would be patient with further interest rate hikes, signalling a potential end to its tightening cycle amid signs of a possible economic downturn. Federal Reserve further surprised markets by issuing a separate statement regarding its balance sheet, indicating that its efforts to reduce the $4 trillion asset portfolio could end sooner than expected.
Japan 10-year & Germany 10-year benchmark bond yields fell by 1 bps and 3 bps respectively after the U.S. Federal Reserve signalled its monetary policy tightening might be at an end amid a cloudy outlook for the world’s largest economy.
Germany bond prices were further boosted after Eurozone economy was estimated to have expanded by a minimal 0.2% over the last quarter of 2018, according to preliminary estimates by the Eurostat. The stats suggest the weakest performance since 2013. Italy economy contracted for the second consecutive quarter at the end of last year, throwing the country into recession. Gross domestic product fell a quarterly 0.2% in Q4 2018, following a 0.1% decline in Q3 2018.
Greece 10-year benchmark bond yields fell 15 bps, Greek bond yields dropped sharply following a successful five-year bond sale, Greece’s first since exiting its bailout last year. Greece’s 10-year government bond yield fell to its lowest level since August 2018
Italy 10-year benchmark bond yields rose by 6 bps, Portugal 10-year benchmark bond yields fell by 1 bps, Spain 10-year benchmark bond yields fell by 3 bps.
Emerging economies 10-year benchmark bond yields largely fell last week.
Australia 10-year benchmark bond yields rose by 1 bps after better-than-expected Q4 inflation data, where the Q4 core inflation came in in line with RBA expectations, while headline inflation was a little stronger than market consensus. Q4 CPI showed a slight improvement, which rose 0.5% q/q, against market expectation of 0.4% increase.
Russia 10-year benchmark bond yields fell by 16 bps after Retail sales in Russia increased 2.3% y/y in December of 2018, following a 3% rise in the previous month, however retail sales missed market expectations of a 2.8% gain
China 10-year benchmark bond yields fell by 1 bps. South Africa 10-year benchmark bond yields fell by 11 bps, Brazil 10-year benchmark bond yields fell by bps, Indonesia 10-year benchmark bond yields fell by 20 bps.