The Global Monetary Policy Week - Fed, BOE, and BOJ

The interest rates remained unchanged in the Federal Reserve policy meeting held this week. Fed pointed to solid US economic growth and a strengthening labor market, while playing down the hard truths about the hurricanes' aftermath. This indicates that you can expect interest rates to rise again in December.

On that encouraging tone, the central bank's policymakers acknowledged that inflation remained soft, but did not downgrade their assessment of pricing expectations.

Further, US Treasury yields were largely unchanged after the release of the statement.

Notably, the Fed has raised rates twice this year, and currently forecasts another nudge upwards in its benchmark lending rate from its current target range of 1% to 1.25% by the end of 2017.

In its statement, the central bank reiterated, it expects inflation to rise up to its target over the medium term. Further, it emphasized that the unemployment rate has declined further.

US financial conditions continue to be fluid, strengthening the argument that another rate rise would not slow the current brisk growth. The government reported last week that the economy grew at a 3% annual rate in the third quarter.

A decline in hiring trends in September has been largely dismissed as a blip caused by the temporary displacement of workers due to Hurricanes Harvey and Irma.

In other major development, President Donald Trump has nominated Jerome Powell to run the Federal Reserve after current Chair Janet Yellen's termination.

This decision was after an extended period of speculation over who would head the central bank at a time of low interest rates, surging employment, and rising asset prices.

Powell is seen as more dovish on interest rates, and this is said to pressurise US Treasury yields going forward.

With the US economy chugging along for many months, the Fed is now gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

US Federal Reserve rate hikes generally have a negative impact on emerging economies. But currently, India is seen as better equipped than other emerging markets to ride the impact of higher US interest rates on the back of stronger economic growth.

The central bank is scheduled to hold its final policy meeting of the year on 12-13 December.

The Bank of England (BOE) raised interest rates for the first time in a decade to head off rising inflation putting the squeeze on UK households.

The central bank's Monetary Policy Committee (MPC) voted 7-2 in favour of increasing the base rate from 0.25% to 0.5%. The minutes underscored worries that the economy is fragile as the 2019 split with the European Union nears. However, the minutes also indicated that further rate increases will be limited and that the central bank is in no hurry to raise interest rates again.

The bank kept its forecasts for growth and inflation broadly unchanged and sees price gains at 2.2% in three years, slightly above its 2% target. The estimates are based on market projections for the key interest rate reaching 1% over that period.

The bank retained its bond programs and reiterated that any future interest-rate increases will be limited and gradual.

Meanwhile, the Bank of Japan (BOJ) kept its policy settings steady. The BOJ slightly cuts its inflation forecasts for the current fiscal year ending March 2018. But maintains its optimistic projections for the following years. And maintained its view that inflation will hit 2% target by March 2020.

Japan's economy expanded at an annualised 2.5% in the second quarter as consumer and corporate spending picked up, with steady growth likely to be sustained in coming quarters.

With inflation still far below 2% target, BOJ indicates that its ultra-easy policy will continue for some more time. Apart from bond purchases, the bank keeps buying exchange traded funds (ETFs) at an annual pace of 6 trillion yen.

The other central banks, Fed and ECB, are gradually unwinding the easy money policy. On the other hand, the BOJ is maintaining the pace of its stimulus program. But sooner or later, we might see the end of easy money.

Global indices ended the week on a positive note. European stocks traded in an uptrend during the week. Germany (DAX) ended with gains of 1.98%, France (CAC) ended with gains of 0.43%, and the London market (FTSE) was up 0.74%. Asian markets ended the week on a mixed note. The Nikkei Index was up 3.68%, the Hang Seng Index ended up 0.58%, and the Shanghai Index was down 1.32%. US markets traded in the green and ended their session with a gains of 0.94%.

'Ease of Biz' Ranking Lifts Indian Stock Markets

Back home, the Indian indices ended their weekly session on a strong note. The BSE Sensex was up 1.60% for the week, while the NSE Nifty was up 1.30%.

Realty (+8.57%), Telecom (+7.67%), and Bankex (+3.54%) were the biggest gainers for the week. Metals (-0.51%) and IT (-0.33%) were the biggest losers.

India broke into the top 100 in the World Bank's Ease of Doing Business rankings. This was seen on the back of big gains on a number of measures.

The above development makes India one of the top 10 best-improved countries.

Note that India was ranked at the 130th position in the last recording and the government has set itself a target of breaking into the top 50. However, India had risen only one position in the 2017 ranking.

For further improvement, what the business environment in India needs is to foster a more supportive environment for private sector activity. While this could take time, if efforts are sustained over the next several years, they could lead to substantial benefits for Indian entrepreneurs - along with potential gains in economic growth.

In news from the economy, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit, India's manufacturing lost steam in October after a sustained recovery in August and September. The PMI had contracted sharply in July. The launch of the Goods and Services Tax (GST) weighed heavily on the Indian manufacturing industry in July.

PMI in October stood at 50.3, declining from the 51.2 in September. Both purchasing activity and pre-production inventories decreased due to subdued demand.

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

The report stated, the downward movement in the headline index was partly driven by a stagnation in new business. It linked subdued demand conditions to negative impacts of GST. Meanwhile, new export orders for Indian goods reduced in October. The report revealed, the rate of contraction was the fastest since September 2013.

The data comes as the Reserve Bank of India's (RBI's) Monetary Policy Committee kept interest rates unchanged last month because it anticipates upside risks to retail inflation. It also slashed its growth projections for the current fiscal and raised its inflation projections.

In other news, as per an article in the Economic Times, the assets under management of five equity mutual funds has crossed Rs 150 billion. Cumulatively, these five mutual funds manage assets worth Rs 890 billion.

Further, with buoyant capital markets and the mutual fund industry on a roll, asset management companies are also seeming eager to unlock value through initial public offerings (IPOs). And the first mover in this race is Anil Ambani promoted Reliance Nippon Life Asset Management Company which concluded its Rs 15.4 billion offering recently.

In another development, foreign investors have pumped in close to US$ 3 billion in the Indian capital markets. Interestingly, most of the funds have been infused in the debt markets.

According to the latest depository data, FPIs invested a net sum of Rs 28.1 billion in the stock markets and another Rs 151.3 billion in debt, taking the total to Rs 179.4 billion (US$ 2.8 billion) during 3-27 October.

Reportedly, Indian bonds remain attractive on high nominal and real yields as well with the backdrop of macroeconomic stability and hence, it continues to attract FPIs. With regards to lower equity inflows, it can be attributed to profit booking by FPIs amid high valuations.

Nifty 50 Index Ends at Life High
Nifty 50 Index Ends at Life High

The Nifty 50 Index traded another week on a strong note. On Monday, it opened the session higher and continued to trade up to close positive. The index witnessed some selling pressure the next day, but the bears couldn't hold it down. On Wednesday, the index gapped up 55 points to hit a new lifetime high after India received a boost from the World Bank for ease of doing business. Finally, on Friday, the index continued to trade positive and ended the weekly session at its life high - up 1.30%.

The index formed a hanging man candlestick pattern on the daily chart, which is a short term reversal pattern. A negative open and close in the next trading session will validate the pattern. This could mean a short term correction on cards.

From the low of 9,688 to today's close 10,452, the index has rallied one-sided in the past one month - up 7.90%.

Will the hanging man pattern bring in correction for the Indian markets or will the index continue with its steady momentum? Let's wait and watch...

COMMODITIES

Gold Trades on a Negative Note

Gold traded on a negative note during the week. On Monday, it opened the session lower, but recovered positive toward the end the session. On the flipside, the buying did not last for long and the yellow metal declined the next day owing to slackened demand from local jewelers amid a weak-demand trend overseas. The commodity recovered a bit during the mid-week on increased demand from Chinese retail investors. Finally, on Friday, gold witnessed continued to trade south and ended the weekly session with loss of 0.78%.

Gold Trades in a Downtrend


Silver Witnesses Volatility

Silver traded on a volatile note during the week. It opened the weekly session in negative, but recovered to close positive. It slipped lower on the next day. The selling pressure did not last for long as, the commodity witnessed strong buying interest during mid-week. Buying action was noticed in the middle of a sturdy global trend. The white metal witnessed minor profit booking towards the end of the week. Silver witnessed immense selling pressure on the final day of the week and ended its weekly session with 0.26% loss.

Crude Oil Trades on a Positive Note

Crude oil traded on a positive note during the week. It opened its session higher on Monday and traded positive until midweek where the black gold found some minor profit booking. The buying was seen as data showed OPEC continues to maintain its stance on supply cuts. The commodity resumed it up move towards the end of the week and ended its weekly session up by 2.23%.

Crude Oil Witnesses Buying Interest

Natural Gas Ends Flat

Natural gas traded on a volatile note during the week. On Monday it opened the session gap up, and slipped lower to trade in a downtrend until midweek. The bearish November weather forecast punts prices lower. It recovered a bit towards the end of the week and witnessed some buying interest on the final day of the week. Finally, natural gas ended the weekly session flat.

CURRENCIES

Dollar Witnesses Selling Pressure

The dollar traded on a negative note, opening its session lower on Monday. It continued to trade negative throughout the week. The 'ease of biz' ranking boost Indian currency against the dollar. The rupee also remained strong on back of FIIs inflows as the domestic equities remained firm. Finally, on Friday, the currency witnessed some more selling and ended the weekly session with loss of 0.85%.

Dollar Ends in the Red

Euro Trades on a Tepid Note

The euro opened the weekly session lower and traded on a slight negative note. Recovering a bit, the down move continued and the euro demand was dull until mid-week. It remained quiet on lack of eurozone data. The currency witnessed higher buying towards the end of the week. Finally, on Friday, the euro continued to trade dull and ended its weekly session 0.57% down against the rupee.

Pound Trades on a Negative note

The pound traded on a negative note during the week. It opened the weekly session gap up and continues to trade strong until mid-week. The currency witnessed buying on back of positive UK manufacturing PMI data. The currency witnessed selling pressure towards the end of the week as Band of England (BoE) raises interest rates. The sterling finally ended the weekly session with loss of 1.02%.

Yen Ends in the Red

The yen traded on a negative note during the week. On Monday, it opened the session higher and traded positive until midweek. The currency rose as Bank of Japan (BoJ) keeps policy steady. But the buying was temporary as the currency plunged towards the end of the week amid weak economic data. Finally, on Friday, the yen continued the down move and ended the weekly session with loss of 0.85%.

Commodities 27th Oct 3rd Nov % Change
Gold/10 gms 29,318 29,088 -0.78%
Silver/kg 39,149 39,048 -0.26%
Crude Oil/barrel 3,501 3,579 2.23%
Natural Gas/mmBtu 194.20 194.20 0.00%
Currencies 27th Oct 3rd Nov % Change
USD / INR 65.29 65.74 -0.85%
EUR / INR 75.94 75.50 -0.57%
GBP / INR 85.58 84.71 -1.02%
JPY / INR 57.28 56.80 -0.85%

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