Powell sees progress on taper conditions though a ways to go

Global developments

The Hang Seng yesterday recovered from the steep fall of the day before and the fact that there was no follow-through helped the risk sentiment recover. The Fed too did not spring any surprises. It kept rates and asset purchases unchanged as expected. While it acknowledged that there was progress towards attaining conditions for taper, it did not give a clear timeline for the same. Instead of the word transitory, the Fed said elevated inflation currently was on account of a handful of items. The Fed seems more focused on the labor markets for now. Chairman Powell in his speech said that the unemployment rate at 5.9% understated the problems in the labor market. He said progress in the labor market was "ways off" and that substantial further progress would mean at least a couple of strong payroll prints. It would be important to track US data, especially labor market data closely in the coming months. US inflation expectations are higher, Real rates are lower. 2y real rate is now at -2.67% and 10y at a record low of -1.17%. Consequently, Dollar has weakened across the board. Risk assets are doing well. US Q2 GDP and weekly jobless claims are the major data due today.

Domestic developments

Equities

Equities recovered intraday yesterday with Nifty ending just 0.24% lower after being 1.5% lower at one point. Asian equities are trading with good gains after a flat close on Wall Street.

Bonds

Supply has returned with a couple of fresh AAA PSU issuances yesterday. Corporate bond spreads have widened in that tenor. Yields on Gsecs were mostly flat with 10y ending at 6.17%. T-bill cut-offs came in 3-4bps lower than the last auction with 12m coming in at 3.73%. 3y and 5y OIS ended at 4.69% and 5.21% respectively. We expect another sideways session for bonds today.

USD/INR

USD/INR was under pressure due to month-end exporter selling, currency derivative expiry, and inflows related to overseas corporate bond issuance. Forwards have followed money market yields lower with a 1y forward yield now at 4.42%.

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 73.20 – 75.50 and the 6M range is 73.50 – 76.50.

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