Ahead Today
G3: US ISM Manufacturing
Asia: Indonesia Trade, Indonesia CPI, India Manufacturing PMI
Market Highlights
Markets made some violent moves as confirmation of a Kevin Warsh led Federal Reserve led to a repricing of risk assets together with a stronger Dollar. In particular, silver prices fell sharply by close to 30% in a move for the history books, while gold, copper and several other commodities also fell meaningfully. The US Treasury yield curve twist steepened, with US 10-year yields rising to 4.27% at one point while front-end yields fell.
So, who exactly is Kevin Warsh, such that he provided such a large jolt to markets? History would suggest he is a hawk with a predisposition to focus on inflation - and this was true all throughout the Global Financial Crisis when he was a Fed Governor even as unemployment rates rose sharply. History would also suggest that he does not like the Fed expanding its balance sheet and more generally believes that the Fed has been overstepping its mandate over time. He famously told Ben Bernanke that he was making a mistake in engaging in quantitative easing back in 2011.
More recently however, Kevin Warsh has been more supportive of interest rate cuts, due to his views that there has been a productivity boom in the US through AI, and with that rates can be lowered without causing undue inflation. Whether he can coalesce his Fed colleagues both into doing so and also other key beliefs such as reducing the size of the Fed's balance sheet remains to be seen, and it will probably also need to be combined with other policies such as banking sector deregulation to ensure sufficient natural demand for Treasuries over the medium term. How these dynamics also interact with Trump's proclivity to lower rates also remains to be seen.
For now, the silver lining is that the fundamentals remain quite supportive of global growth, and among other factors such as further Fed rate cuts for the Dollar still to weaken and Asian currencies to strengthen through 2026 in our view. Leading indicators for Asia's exports continue to be robust while the lagged impact of accommodative monetary and fiscal policy should continue to support the economy in 2026, even as China's economy stabilises.
In our region, we continue to favour the high beta and electronic exporting FX in our region, such as KRW, MYR, and to a smaller extent CNY and TWD.
We remain negative on the Indian Rupee and see it underperforming through 2026, and we also think India's local currency rates will likely grind higher.
India's government announced its FY2026/27 Budget on 1 Feb, Sunday. The biggest takeaway from an INR FX and rates perspective is the slower than expected pace of fiscal consolidation (4.3% of GDP deficit in FY2026/27 from 4.4% of GDP previously), and with that larger than expected gross and net borrowing requirements of INR17.2 trillion and INR11.7 trillion (with INR5.5 trillion of repayment needs).
These matter because bond markets in India were already struggling to absorb the current pace of State Development Bond issuances with rising state government borrowing needs given sticky cash handout transfer programs over the years. As such, we think that RBI will likely have to inject more liquidity to cap bond yields or at least the pace of INR bond yield increases.
From an FX perspective, this also means that foreign bond inflows may be somewhat harder to come by given also elevated FX hedging costs.
From a macro perspective, we also think that the Budget FY2026/27 was a little bit of a missed opportunity in pushing through more fundamental reforms and policy changes. There were of course important and good reforms introduced such as the simplification of customs tax codes, together with more fiscal support for pharmaceutical, electronics, and textile manufacturing, among others. Taken in totality, the changes stuck more to the tried and tested in our view, and as such is unlikely to change the trend of INR weakening for now.
