Powell sees tapering a ‘ways off,’ gets house inflation grilling
|Global developments
US Fed Chair Powell once again succeeded in selling the 'transitory inflation' argument to the market. Investors looked through the elevated June CPI data that came out yesterday and the PPI data today that came in higher than expected. His testimony to the House Finance Services committee was dovish. Powell said that there was a long way to attain 'substantial further progress' (on economic growth and unemployment). He added that the Fed would give advance notice before announcing its decision to taper asset purchases. US yields fell 4-8bps across the curve mostly on account of a fall in real rates. The Dollar weakened and risk sentiment improved. The Euro and Pound have bounced back 60-70 pips off yesterday's lows. Crude sold off on reports that the UAE and Saudi Arabia had reached a compromise regarding an increase in UAE's baseline output. It is believed to have increased by 0.5mbpd. China's GDP grew 7.9% YoY in Q2 against the expected 8%. Chinese retail sales and industrial output bear estimates.
Domestic developments
After CPI yesterday, the Domestic June WPI print too came in below expectations at 12.07% (exp 12.2%). Core WPI rose by the slowest pace in four months.
Equities
It will be interesting to see if the Nifty manages to close above the 15900 marks today given positive overnight cues from Wall Street. Asian equities are trading in the green.
Bonds
Rates eased further with 3y and 5y OIS falling 4bps to 4.70% and 5.29% respectively. The yield on the benchmark 10y bond yield was unchanged at 6.11%. 6m and 12m T-bill cutoffs came in 3bps lower at 3.59% and 3.80% respectively. 3-5y AAA corporate bonds are still offering decent yield pick up. We may see a rally in bond markets today on lower crude prices and lower US yields.
USD/INR
The Rupee traded a narrow 74.55-74.65 range yesterday. Asian currencies are trading mixed. We expect the nationalized banks to keep mopping up inflows around 74.40 on behalf of the central bank.
Strategy: Exporters are advised to cover a part of their near-term exposure on upticks toward 74.90. Importers are advised to cover through options. The 3M range for USDINR is 72.50 – 75.50 and the 6M range is 73.00 – 76.50.
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