US consumer prices outpace forecast as inflation dogs economy
|Global developments
US Sep CPI came in higher than expected at 5.4% YoY and 0.4% MoM. US inflation expectations have risen across the curve as many market participants now feel that inflation may not be as transitory as was believed earlier. US 2y real rate is now back to -2.50%. Longer-term yields have come off despite a surge in inflation expectations, on growth concerns. The yield curve has flattened as a result.
The FOMC minutes reinforced the belief that tapering would be gradual and that asset purchases would end over 8-9 months, at a pace of about USD 15bn a month.
The dollar weakened across the board on drop-in short-term real rates.
US September PPI and jobless claims data are due today.
Domestic developments
Equities
Drop-in long-term yields resulted in the Nasdaq being the best performer among US equity indices. Asian equities are up.
Bonds
The bond markets saw a relief rally after the post-policy sell-off on comforting domestic CPI data and lower US Treasury yields. Yields dropped 2-4bps across the curve with the yield on benchmark 10y ending at 6.32%. 3y and 5y OIS dropped 5bps and 8bps respectively to end at 4.94% and 5.44%
USD/INR
We saw two-way price action in USD/INR yesterday but there are signs of volatility dampening. Weaker Dollar, stalling crude rally, upbeat sentiment in domestic stocks should bring some respite to the Rupee. 1y forward yield ended at 4.46% yesterday while 3m Atmf vols ended at 5.05%
Strategy: Exporters are advised to cover at the current level. Importers are advised to cover on dips towards 74.50 The 3M range for USDINR is 73.80 – 76.00 and the 6M range is 73.50 – 76.50.
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