ECB Minutes, Japan's Economic Data, and the RBI Monetary Policy

Minutes from the European central bank's (ECB) last meeting showed the policymakers debate on the ECB asset purchase programme. The discussions were centered around whether or not they should extend asset buying. Some policymakers argued that a reduction was warranted.

With the ECB's current 2.3 trillion euro bond purchase program due to end this December, policymakers debated the merits of either extending the scheme with smaller monthly purchases over a relatively long time frame, or retaining bigger monthly purchases in a shorter period.

If the ECB goes with the first option, this would mean that the timing of interest rate hike is in turn pushed further. Thus, any rate move would occur well after the end of its asset buys.

The minutes showed that the broad is most likely to decide their course of action at the meeting on October 26.

Markets currently expect the central bank to cut its purchase volumes by a third, to 40 billion euros a month, with the scheme being extended by six to nine months.

One view was that conditions were becoming increasingly conducive to adapt the intensity of the monetary policy accommodation. The minutes showed that this would provide an opportunity to scale down the Eurosystem's net asset purchases.

Another issue on table was whether to keep the purchases open-ended or to fix an end date, likely resulting in a compromise that would make a further extension a viable option.

Austrian central bank Chief, Ewald Nowotny, in a speech at a conference on financial supervision said, the European Central Bank should tighten monetary policy gently. He suggested to not brake abruptly, and to slowly ease the foot off the pedal.

Despite the European economy recovering, the job isn't done. And that a smooth exit from crisis-era policies would only be possible if it kept a tight grip on short-term market rates.

With inflation still being below the ECB's 2% target level, there might be an extension in the asset buying program. Presently, it is considering to end the stimulus program. Most of the economic problems, we see today, are fueled by the easy money policies that central banks have adopted around the world. However, with the changes happening at central banks of late, it seems that the end of easy money is near.

Moving on to Japan, economic data showed that its manufacturing activity in September expanded at the fastest pace in four months. This was because the domestic and export orders picked up in a sign of strengthening the economic momentum.

While, services sector expanded in September at the slowest rate in 11 months as the pace of new orders eased.

The manufacturing PMI stood at 52.9 in September v/s 52.2 in August. And, the service PMI fell to 51 in September from 51.6 in August. A reading above 50 signifies expansion, whereas a reading below 50 signifies contraction.

The new business index also expanded at a reduced pace (52 from 52.4) while the index for business sentiment rose to 53.3 from 52.4.

The composite PMI, which includes both manufacturing and services, fell to 51.7 in September from 51.9 in the previous month.

Apart from this, in the April-June quarter, Japan's economy saw output exceed full capacity in nine years. The output gap stood at 1.22% during this time, staying in positive territory for the third straight quarter.

A positive output gap occurs when the actual output is more than full capacity. This happens when factories and workers operate above their most efficient capacity to meet increase in demand. When a positive output gap expands, it is a sign that inflationary pressure is building.

This is a positive sign for the central bank, as it seeks to accelerate inflation to its 2% target.

Japan's economy expanded at an annualized 2.5% in the second quarter, marking the sixth consecutive quarter of growth, as consumer and company expenditure picked up. Corporate profits are at record-high levels and the job market is near full employment. We have seen a dramatic improvement in Japan's economy.

But the price and wage growth remains weak with firms still wary of passing more of their profits to employees. This has forced the Bank of Japan (BoJ) to push back its timing for reaching its price target six times since deploying a massive stimulus programme in 2013.

What remains are many issues that can hamper Japan's economic growth going forward. The economy is flooded with excessive money printing, extensive debt, major government intervention, and stock market manipulation. But sooner or later, the easy money will end.

Global indices ended the week on a strong note. European stocks traded on a positive note. Germany (DAX) ended with gains of 0.99%, France (CAC) ended with gains of 0.56%, and the London market (FTSE) was up 2.04%. Asian markets too ended the week on a positive note. The Nikkei Index was up 1.64%, the Hang Seng Index ended up 2.89%, and the Shanghai Index was up 1.03%. US markets traded in the green and ended their session with a gains of 2.12%.

Indian Stock Markets Cheer RBI Decision

Back home, the Indian indices ended their weekly session on a strong note. The BSE Sensex was up 1.69% for the week, while the NSE Nifty was up 1.95%.

Barring Telecom (-1%), all the sectorial indices ended the week on a positive note. Energy (+5.10%), Metal (+4.40%), Oil & Gas (+4.20%) were the biggest gainers for the week.

The Reserve Bank of India (RBI) ended its fourth bi-monthly monetary policy meeting this week. The monetary policy committee (MPC) kept interest rates unchanged because it anticipates upside risks to retail inflation. It also slashed its growth projections for the current fiscal year and raised its inflation projections.

The six-member monetary policy committee kept the repurchase rate - the rate at which the central bank infuses liquidity into the banking system - unchanged at 6%. The central bank maintained its neutral policy stance, but acknowledging sluggish economic activity, lowered its fiscal 2018 projection for gross value added, a growth metric, to 6.7% from 7.3%.

On growth, the RBI reiterated the need to revive sluggish private sector investment to give a fillip to the economy, as well as improve demand for overall credit.

In news about the economy. According to the Nikkei Purchasing Managers' Index (PMI) survey by Markit, India's manufacturing continued to revive in September, after growing marginally in August. PMI in September stood at 51.2, unchanged from the reading in August, continuing the growth track.

India's services sector activity rebounded in September after it was impacted in the previous two months. The services PMI for September closed at 50.7, signaling a steady recovery from 47.5 in August.

The PMI is the reading of the country's manufacturing and services sector output and is updated monthly. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

Following the launch of the Goods and Services Tax (GST), the sectors showed signs of rebounding after contracting in July. Manufacturing sector expansion came a day after government data showed manufacturing growth in the first quarter of the current financial year fell to 1.2% from 10.7% a year ago, bogged down by the lingering effects of demonetisation and GST rollout. This made India's GDP growth slump unexpectedly to a three-year low of 5.7%.

On the prices front, the survey said that though cost pressure intensified during September, inflation remained weaker than the long-run trend. Strengthening of the Indian rupee may put a squeeze on revival efforts for the demand of Indian goods from export markets.

Going forward, manufacturing activity is set to grow as manufacturers begin production for the festive season.

Despite service providers retaining an optimistic view towards the year-ahead for activities, the overall sentiment decreased in August. Participants in the survey indicated that the new taxation system and advertising campaigns are anticipated to support growth. However, there were worries about the pressures of competition.

Both manufacturing and services firms continued to absorb some input cost pressures in September to attract demand, which is likely to keep inflation below the RBI's 4% medium-term target.

But the RBI kept its policy rate steady at a near seven-year low of 6% on Wednesday, reflecting its concern that consumer inflation could accelerate further after it reaches a five-month high of 3.4% in August.

From other news, the government has named Rajnish Kumar as the new Chairman of State Bank of India (SBI) for a three-year term. Kumar will succeed Arundhati Bhattacharya on the completion of her term this Friday.

Nifty 50 Index Witnesses Buying Interest

The Nifty 50 Index traded on a strong note during the week. On Tuesday, it opened to 104 points gap up, but slipped lower to end the session at 71 points up. But, the bullish momentum continued as the index witnessed a rise in buying interest the next day. This was because the RBI announced its fourth bi-monthly policy keeping the key interest rate unchanged. The index traded dull on Thursday. However, it resumed the climb on the final stretch of the week, where it rose almost 100 points just shy of 10,000 mark. The Nifty ended the weekly session 2% up.

Although the index rallied during the week, looking at the broader perspective, it is stuck in a range of 9,700 - 10,150 since July. Unless we see a sustained break-out on either side of this range, the index trend remains uncertain.

COMMODITIES

Gold Edges Down to 7-week Low

Gold traded on a negative note during the week. On Tuesday, it opened the session lower and continued to trade down throughout the week. The down move in the yellow metal was seen, as equities gained. The growing expectations for a Fed interest rate hike in December also added to the pressure. Finally, on Friday, gold continued recovered a bit but ended the weekly session with a loss of 0.59%.

Gold Trades on a Negative Note

Silver Ends Marginally Higher

Silver traded on a positive note during the week. It opened the weekly session lower and traded in a downtrend until midweek. The selling took place on the back of weak trends in the overseas market and a fall in demand from local jewelers. On Thursday, the commodity recovered a bit due to increased offtake by industrial units and coin makers. The metal witnessed buying interest on the final day of the week to end its weekly session with marginal gains of 0.35%.

Crude Oil Witnesses Selling Pressure

Crude oil traded in a downtrend during the week. It opened its weekly session lower on Tuesday and continued to trade down until midweek. Crude oil prices dipped, due to concerns that higher prices might spur an increase in US shale production. The black gold recovered a bit towards the end of the week, with the expectations that Saudi Arabia and Russia would extend production cuts. Finally, on Friday, the selling in the commodity continued and it ended its weekly session down by 2.91%.

Crude Oil Ends 3% Down

Natural Gas Plunges 5% for the Week

Natural gas traded on a negative note during the week. On Tuesday, it opened the session down and witnessed selling pressure throughout the day to close the session 4% lower. The price plunged as traders reacted to the reality that higher demand for the commodity was diminishing. But the commodity recovered gradually, forging ahead into the mid-week on a smaller-than-expected storage injection. Finally, on Friday, the down move resumed and natural gas ended the weekly session 5.09% down.

CURRENCIES

Dollar Trades on a Volatile Note

The dollar traded on a volatile note during the week. It opened its session higher on Tuesday and slipped a bit but finally ended the session positive. The dollar weakened until mid-week as RBI maintained status quo. It recovered a bit towards the end of the week with demand from importers. Finally, on Friday, the dollar witnessed some more buying and ended the weekly session flat.

Dollar Ends Flat

Euro Trades on a Negative Note

The euro traded on a negative note during the week. It opened the weekly session gap low, but recovered a bit towards the end of the session. But, the selling pressure continued and euro traded in a downtrend for the remainder of the week. The selling was seen amid Catalonia concerns in Spain. Finally, on Friday, the euro recovered a bit but ended its weekly session 0.84% lower against the rupee.

Pound Witnesses Selling Pressure

The pound witnessed selling pressure during the week. It opened the weekly session lower and continued to trade in a downtrend throughout the week. The pound slipped as British manufacturing PMI disappointed and UK construction PMI contracted. The selling accelerated on Friday and the currency ended the weekly session with 2.28% loss.

Yen Trades on a Negative Note

The yen traded on a negative note during the week. On Tuesday, it opened the session gap down to trade negative until Wednesday, following the release of some widely varying earnings data. The currency witnessed some short covering during midweek. Finally, on Friday, the yen again traded down and ended the weekly session with marginal loss of 0.37%.

Commodities 28th Sep 07th Oct % Change
Gold/10 gms 29,749 29,573 -0.59%
Silver/kg 39,457 39,596 0.35%
Crude Oil/barrel 3,373 3,275 -2.91%
Natural Gas/mmBtu 198.40 188.30 -5.09%
Currencies 28th Sep 07th Oct % Change
USD / INR 65.51 65.55 0.06%
EUR / INR 77.48 76.83 -0.84%
GBP / INR 87.79 85.78 -2.28%
JPY / INR 58.31 58.10 -0.37%

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