Fed chief Jerome Powell is looking for 50 basis point interest rate hikes.
- According to Eurostat, inflation in the bloc hit 7.4% in March after rising 5.9% in February.
- China kept the prime lending rate unchanged in April, despite expectations from some market participants for a rate cut.
- Official data showed retail sales volumes fell 1.4% in March from February, a reading worse than any economist predicted in a Reuters poll.
- The MPC minutes signal a clear shift that RBI is now prioritizing controlling inflation.
- The yuan was the worst performing Asian currency over the past week, depreciating more than 2% against the dollar.
USD/INR Weekly Performance and Outlook
USD/INR widened at the open at 76.40 and remained volatile over the week. The pair closed the last day of the trading session at 76.48 levels. USDINR finished higher trailing the strong dollar following President Powell’s hawkish speech at the IMF event and a sell-off in domestic stocks on global risk sentiments. The dollar index climbed for the second consecutive session and tested the 101.00 mark at the end of the week amid renewed weakness in the risk complex, higher US yields and rising geopolitical tensions. Almost all members of India’s monetary policy committee advocated action to curb inflationary pressures at their April 6-8 meeting despite lingering risks to economic growth, minutes show. published. Although it opted to keep its key rate at a record high, the Reserve Bank of India said after the meeting that it would abandon its ultra-loose monetary policy to focus on inflation, which has surged due to the war in Ukraine. The USDINR pair is expected to trade with a neutral to bullish bias on the back of a stronger dollar globally, rising US yields, the lockdown situation in China which is expected to impact the supply chain. global supply, worsening global inflation. The economic calendar for the United States would include March durable goods orders, US gross domestic product for the first quarter and core personal consumption expenditure for March on annual and monthly readings, alongside the Chicago PMI.
ECB may have to revise growth outlook down – Lagarde.
EUR/USD adds to Thursday’s pullback and pulls back further after climbing as high as the 1.0940 area in the previous session. Indeed, the reappearance of the USD supply bias has put the pair under renewed and quite strong downward pressure following another hawkish message from Chief Powell in his speech at the IMF event on Thursday. The price action of the EURUSD pairs shows further deterioration below 1.0790 in the week ahead. The outlook for the pair still remains tilted to the bearish side, in response to USD momentum, geopolitical concerns and the Fed-ECB divergence. ECB President Christine Lagarde said the European Central Bank may have to downgrade its growth outlook as the fallout from Russia’s war in Ukraine weighs on households and businesses. The EURUSD pair is expected to trade with a neutral to bearish bias overall over the coming week due to the tensions in Ukraine and Russia and its subsequent impact on commodity prices which is expected to worsen the already existing inflation situation. in the euro area.
BoE walks a tightrope between inflation and recession, says Bailey.
GBP/USD fell below 1.3000 to its lowest level in 17 months on a weak retail sales report. The ONS reports a 1.4% drop in total sales in March after falling 0.5% a month earlier. Sales excluding fuel fell by 1.1% after 0.9% in February and posted a drop of 0.6% over one year, a clear sign of the severity of the current economic situation. Rising prices and wages have so far had little impact on retail activity, which could prove a complication for the Bank of England amid further monetary policy tightening. A perfect storm of soaring energy prices, higher taxes and high inflation sent Britain’s consumer confidence index dropping seven points to -38 in April, its lowest level since 2008, as it was minus 39, according to market research firm GfK. The pair is expected to trade with a neutral to bearish bias due to rising inflation, the strong dollar and the unending Russian-Ukrainian war tension situation.
The US dollar index hit a 2-year high at 101.34 on comments from Fed policymakers.
The US Dollar Index ended the week on a higher note, taking the week’s final session gain to 0.60%, and ended at 101.21, albeit below the 2 high. years reached during Friday’s session at 101.34. Factors like the Fed talking throughout the week have increased the appetite for the dollar. Additionally, rising US Treasury yields supported the dollar, with the benchmark 10-year US Treasury yield ending at 2.90%. Fed Chairman Jerome Powell signaled a half-point interest rate hike by the May 4-5 meeting. Meanwhile, money market futures fully priced in a 0.50% hike in the federal funds rate, which would take it to 1%. The US Dollar Index is expected to trade with a neutral to bullish bias as the Global Dollar strengthens due to higher rate expectations and risk aversion, which could make risky assets less attractive and reduce risk. flows from emerging markets.
National and global actions:
Overall, Indian equities remained volatile over the week. The outflows from FIIs, the strengthening dollar and rising US yields provided ideal ground for FIIs to retreat to a safe haven. Out of a total of five trading sessions, Clever mostly saw selling for three days with a correction of nearly one percent each day. The nifty index plunged more than 200 points in the last trading session after comments from the Federal Reserve that a 75 basis point interest rate hike may be a probability. The banking sector followed the Indian index while consumption corrected slightly. The domestic stock market is expected to remain under pressure as risk aversion may intensify emerging market selling.
The main US stock indices ended the week down. Bullard indicated that a rate hike of up to 75 basis points could be up for discussion, although he also said a move of that magnitude would not be his base case and suggested that the economy is expected to grow this year and into 2023. The NASDAQ fell more than 2.50% as 10-year US Treasuries rose above the 2.90% level. Stocks in Europe fell amid lingering concerns over the war in Ukraine and heightened warmongering among central bank policymakers. Chinese markets fell as investors worried about the economic fallout from coronavirus shutdowns after officials said tough restrictions would remain in place. Stock markets fell as higher interest rate expectations are expected to impact corporate profitability due to the higher cost of borrowing.
Domestic and Global Bonds:
The yield on benchmark 10-year government securities fell from the 6.80% level in March to 7.29% earlier this month, reacting to retail price inflation of 6.95% in India in March, a 17-month high, to the Russian-Ukrainian conflict. , concerns about runaway crude prices and rising interest rates in the United States. However, yields cooled later before giving up gains after Fed Chairman Powell reaffirmed expectations of a rate hike in May. The Center will continue with the FY23 borrowing plan finalized in March despite the recent tightening in bond yields, as it expects the market to stabilize soon. Some expected the Center to hold back some bids following the surge in bond yields. The domestic bond market is expected to remain under pressure due to expectations of Federal Reserve rate hikes, soaring US yields, rising inflation rate and already high crude prices. The benchmark 10-year index closed the week at 7.167%.
Hawkish statements from Jerome Powell’s Federal Reserve set the stage for a half-point hike at the central bank’s May meeting, with chances for three more now priced into money markets. Yields on 10-year Treasury bills jumped more than 50 basis points this month to 2.90%. Traders are bracing for more than 200 bps of tightening by the end of the year, with some hedges emerging for an oversized 75 bps rise. Treasury yields soared in the wake and are expected to remain higher on the back of the hawkish Federal Reserve and aggressive rate hike expectations to rein in soaring inflation.
Net monthly REIT investments:
The FII reversed the buying pattern of the previous week and remained net short of stocks and debt this week. The total outflow of the two handsets during the month of April as of April 22, 2022 was INR -15867 crore. Foreign institutional investor participation in NSE 500 companies fell to a 3-year low at 19.5% in March, levels seen before Covid, a BofA Securities report pointed out. As noted, REITs have been big sellers of Indian equities over the past few months. However, BofA believes that a potential reversal in stock market outflows could lead to a reversal in ownership levels in the months ahead. Corporate earnings, macro data, institutional fund flows and global signals will be featured on Dalal Street this week.