Domestic Bonds

Retail price inflation in India eases to 7.04% in May, but remains above RBI comfort level

Highlights

  • The BOJ keeps rates ultra-low and warns of sharp falls in the yen.
  • The Fed says its commitment to restoring price stability is “unconditional”.
  • The UK economy contracted sharply by 0.3% in April as the slowdown loomed.
  • India’s exports rise 20.55% to $38.94 billion in May; record trade deficit of $24.29 billion.
  • Eurozone CPI rose at record pace in June, energy and food prices accelerated.
  • Venezuelan oil exports to Europe expected to resume after two years – document, sources.

USD/INR Weekly Performance and Outlook

USD/INR widened at the open at 78.0350 and traded between 77.96 and 78.27. The pair closed the week at the 78.07 level. The Indian Rupee traded in a narrow range as RBI continued to offer dollars to prevent the runaway depreciation of the Rupee. Global risk sentiment has deteriorated further as more central banks become increasingly hawkish. While the Fed had turned hawkish and started to rally much earlier, and the effects of Fed tightening are now likely to hurt economic activity in the United States, some of the other central banks only joined the movement only recently. The Indian rupee remained resilient this week as the intervention of the RBI supported the national currency. However, the momentum remains bearish on the back of FII outflows, risk aversion sentiments and higher crude oil prices. The dollar should remain in demand after the flight to safety in a scenario of rising interest rates. Federal Reserve Chairman Jerome Powell reiterated the central bank’s commitment to bringing inflation down.

Fed hikes rates 75 basis points, biggest hike since 1994

EUR/USD:

EURUSD started to decline slightly after testing 1.0600 on Thursday. The risk-friendly market environment is helping the common currency remain resilient for now, but the dollar could continue to strengthen and weigh on the pair in case US Treasury bond yields gain traction. ECB’s Visco said he expects the ECB to continue raising the policy rate in a gradual and sustained fashion after September. Additionally, ECB’s Lagarde said the purpose of the anti-fragmentation tool is not to close spreads, but to normalize spreads. Eurozone consumer prices rose to a record high for the last time as revised data was confirmed, pushing up energy and food prices in particular. According to Eurostat, the rate of increase in the euro zone’s headline CPI accelerated from an annual rate of 7.4% in April to 8.1% in May.

The BoE raises its interest rate to 1.25% to fight against inflation; fifth consecutive rate hike

GBPUSD:

GBPUSD staged a downward correction after gaining over 150 pips on Thursday. As widely expected, the Bank of England announced on Thursday that it had raised its key rate by 25 basis points to 1.25%. The BoE has updated its projections for the CPI and expects inflation to peak at 10% in the fourth quarter of 2022. The MPC estimates that inflation should tame around the target of 2 % in two years as external factors subside. Regarding British growth, the bank expects a contraction in Q2, of -0.3%, weaker than anticipated in its May report. Forward guidance on the path of rate hikes was lacking in the statement, however, the BoE stressed that the magnitude, pace and timing will reflect the Committee’s assessment of the economic outlook and inflationary pressures. Meanwhile, another negative GDP print for the UK economy in April stoked recession fears. Wednesday holds the crucial UK inflation data release, which will be a big market driver for the pound as it affects the BOE’s rate hike expectations.

ECB prepares new tool to tackle rising borrowing costs in weaker economies

Dollar index:

The US Dollar retreated firmly to end the week in a strong position against other major currencies. The hawkish comments continue to extend the risk aversion already seen in the market, even after the recent sharp rate hike by the Fed. This comes after the dollar lost ground on Wednesday and Thursday, although other currencies like the euro and the pound failed to take advantage of the momentary weakness. Their luck evaporated on Friday as rising Treasury yields combined with fearful comments from analysts pushed the U.S. dollar index higher. On June 15, the US Federal Reserve announced a hike of three-quarters of a percentage point or 75 basis points in its target interest rate, in what is seen as a move to curb spiraling inflation. . The central bank, while announcing the rate hike, said it was “strongly committed” to bringing inflation down to 2%. Federal Reserve Chairman Jerome Powell in his recent speech reiterated the central bank’s commitment to reducing inflation, saying it is essential for the global financial system.

National and global actions:

National actions:

A cautious mood in most global markets amid growing recession concerns rattled sentiment on Dalal Street. During the week, the Sensex and Nifty 50 national benchmarks were down around 5%. Most major indexes closed sharply lower, including Nifty Bank, consumer durables and IT stocks. Sensex ended the week’s volatile session at 51,360, while the Nifty 50 closed the week at 15,293. After ending this week on a negative note, Indian domestic equity benchmarks are expected to trade with a bias bearish next week as the US Fed’s aggressive monetary policy has potentially triggered fears of a recession.

Global Equities:

Global equities closed their biggest weekly decline since the March 2020 pandemic meltdown as investors worried that tighter monetary policy from inflation-fighting central banks could hurt economic growth. Investors were reeling this week after the US Federal Reserve unleashed its biggest hike in borrowing costs in nearly 30 years to combat soaring consumer prices. The moves prompted a global selloff on Thursday. US and European markets tried to stage a rebound on Friday, but some indices were back in the red later in the day. The relatively quiet trading capped off a brutal and tumultuous week for Wall Street. The S&P 500 lost 5.8% for its 10th decline in the past 11 weeks. It’s its worst week since March 2020, when stocks plummeted as the global economy came to a sudden halt at the start of the pandemic.

Domestic and Global Bonds:

National obligations:

The bond market is bracing for a sharp hike in policy rates by major central banks to fight inflation in the coming months, which has led to soaring bond yields in all economies. Crude oil prices also remained high, including continued selling of FII by emerging markets. Higher US yields, the impression of high inflation for several years, the economic slowdown in the major economies caused a bad mood in the market. India’s trade deficit widened to a record $24.29 billion in May, which was an all-time high, which also kept the bond market under pressure. The only silver lining the domestic bond market witnessed over the week was the slight decline in the domestic CPI to 7.04% while still remaining above the RBI comfort zone. India’s benchmark 10-year index traded between 7.572% and 7.617% to close the week at 7.546%.

Global Bonds:

Investors’ sharp pullback from government bonds in recent days reflects the growing gloomy outlook for markets following a surprisingly hot inflation report. Yields on Treasury bills largely reflect investors’ expectations of short-term rates over the life of a bond, and they in turn set a floor on borrowing costs across the board. the economy. The yield on the benchmark 10-year US Treasury rose this week to settle at 3.23% at the weekly close, but on Tuesday it touched its multi-year high of 3.498%. Rising yields typically lead to lower stock prices, increasing the opportunity cost of switching from bonds to equities and dealing a particularly heavy blow to relatively unprofitable companies valued for their long-term earnings potential. .

Net monthly REIT investments:

Marking the largest annual outflow, foreign investors have sold Indian stocks worth more than Rs 2 lakh crore in the calendar year 2022 so far. REITs have been selling Indian stocks relentlessly for the past nine months. The strengthening dollar and rising bond yields in the United States are the main triggers for selling REITs. Ever since the Fed and other central banks like the Bank of England and the Swiss central bank raised rates, there have been synchronized rate hikes globally, with yields rising. Domestic flows were robust, however, and absorbed part of the outflows. With US yields rising and the dollar strengthening, outflows from FII are set to continue and could intensify with further aggressive tightening of monetary policies by the world’s major central banks.

Macro-economic calendar