Ahead Today
G3: Germany IFO Expectations
Asia: Singapore CPI, Taiwan unemployment rate
Market Highlights
Global markets remained volatile with some recovery in risk sentiment over the weekend after earlier sharp declines during the week, while the Dollar and Asian currencies were mixed driven by a continued focus on Fed policy, JPY weakness, and some idiosyncratic drivers for the likes of INR. In particular, New York Fed President John Williams said he sees room to lower interest rates again in the near-term as the labour market softens, raising expectations for a December Fed rate cut. In particular, he said that he sees monetary policy as still being modestly restrictive, although somewhat less so than before, and therefore sees room for a further adjustment towards the neutral rate. Post these comments by Wiliams, the Fed Funds Futures markets moved to price in a much greater probability of a Fed rate cut for December, moving from around 35% to above 60% for a rate cut. More broadly, this also comes amidst a very split FOMC, with several speakers including the Dallas Fed President Lorie Logan and Boston Fed President Susan Collins both signalling that holding rates would be appropriate for now.
The weakness in the Japanese Yen was also another key driver and focus of markets with spillovers to Asia FX, with domestic concerns around the path of Bank of Japan rate hikes, the size of fiscal policy stimulus, coupled with tensions between the Japan and China relationship. In particular, the fiscal package announced by Japan’s government last week amounted to JPY21.3 trillion, broken down into four components - 1) JPY 11.7trn for cost of living relief (energy subsidies, local grants, child allowances); 2) JPY 7.2trn for crisis management and strategic growth investments; 3) JPY 1.7trn for defence and diplomatic capabilities; and 4) JPY 2.7trn in tax cuts (income tax relief via an increase in the tax-free threshold and gasoline tax suspension). The general account government spending increase under this plan amounts to JPY 17.7trn, which is up from the JPY 13.9trn from a year ago. JGB yields have surged to all-time highs over the past week with the 10-year yield touching 1.8% and the 30-year yield reaching 3.3% on the back of these developments coupled with uncertainties around the path of Bank of Japan rate hikes. The ongoing tensions between China and Japan and possible economic impact is also another additional factor weighing on the JPY.
There were also some idiosyncratic moves in the likes of the Indian Rupee, with USD/INR onshore spot rising sharply above 88.80 level towards 89.40, while this was also followed by 1 month NDF also rising towards the 89.70 levels. RBI was previously defending the 88.80 level, but heavy stop losses were likely triggered within a short span of time once the pair moved quickly past the 88.80 level with RBI absent on Friday. It is unclear what specifically drove the market move, but a combination of lack of clarity and progress around the US-India trade deal may have been a key contributor, with RBI’s Governor just recently saying he was reasonably confident about INR and see some ease of pressure on FX on the back of a trade deal. On a fundamental perspective, India’s trade deficit has widened sharply but this has been less so due to the direct negative impact of tariffs at least so far, with some diversification from US to non-US markets in tariffed products helping. The trade deficit has widened quite sharply from the indirect impact of an improvement in domestic demand from GST rate cuts, coupled with a surge in gold imports. As a base case, we are assuming that gold imports should moderate from here and domestic demand should soften as pent-up demand post GST fades (but remain better than pre-GST cuts), and so this should relieve some pressure on INR moving forward. Certainly the surge in gold imports diverges quite significantly with low inflation pressures in India thus far. Overall, we still see INR underperforming and think dips in USD/INR will be shallow