Ahead Today
G3: US Initial Jobless Claims
Asia: Taiwan CPI
Market Highlights
Markets generally took some pause after risk-on sentiment earlier this week, with uncertainty around the path of US-Iran negotiations coupled with the upcoming US non-farm payrolls numbers. Iran said that it reached an agreement with Oman on a proposed route for shipping through the Strait of Hormuz, a potential step toward a reopening of the critical waterway for energy supplies. Iran’s foreign ministry spokesperson said that a joint statement between Iran and Oman is under review and in the final drafting stage, but there was no indication of significant breakdown in negotiations with US for now.
The US ISM services index was marginally higher at 54.1 from 54.0, but what was also interesting was the mix and subcomponents. The prices paid component index rose to 70.3 from 67.7 previously, and this tends to have some leading relationship and information about the path of US services inflation moving forward. The employment sub-index fell however, highlighting the difficult balance the FOMC is facing right now.
Overall, our global team remains comfortable with our view that markets are pricing in too many rate hikes in the US, but like a driver driving down a foggy road perhaps the best course of action for a policymaker now is to drive straight and not make any drastic changes for the time being.
On that front, we had the RBI policy meeting yesterday. The central bank kept policy rates unchanged but the key for markets was the neutral tone from the Governor with a bias for watchful waiting and data dependency for now. Post the policy meeting, we continue to see RBI hiking rates by 50bps this cycle but we have pushed out the timing of hikes to start from December 2026 from our previous expectation of October. Meanwhile from an FX perspective, we are forecasting USD/INR grinding lower over the next 3-6 months towards the 94.00 handle, before rebounding towards 96.00 next calendar year. The FX measures will help but from the August policy meeting it doesn’t sound like RBI is looking to actively sell Dollar to generate INR appreciation, and if anything it may use the Dollars to help reduce its net short forward book to some extent moving forward. This nonetheless could still overall be a decent outlook for carry for INR.