Tag: inflation

Fed officials express resolve to address inflation risks

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Federal Reserve officials in discussions earlier this month said the central bank “would not hesitate” to take appropriate actions to address inflation pressures that posed risks to the economy.

In minutes released on Wednesday of the Fed’s November 2-3 meeting, Fed officials maintained that the spike in inflation seen this year was still likely to be transitory while acknowledging that the rise in prices had been greater than expected.

The minutes covered a meeting in which the Fed voted to take the first step to roll back the massive support it has provided to an economy pushed into a recession last year after widespread lockdowns to contain the Covid-19 virus.

At the November meeting, the Fed approved reductions in the amount of Treasury bonds and mortgage-backed securities it had been purchasing to put downward pressure on long-term interest rates.

Also read: The return of inflation and what central banks are doing

The committee approved reducing by $15 billion in November and another $15 billion cut in December in the $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities it had been making. The expectation was that these monthly reductions would continue until the bond purchase programme was phased out in the middle of next year.

Inflation in recent months has been hitting levels not seen in decades. Fed Chairman Jerome Powell and other Fed officials have argued that the prices pressures were likely to be transitory and fade away once problems such as supply chain bottlenecks are resolved.

Fed needs to reduce bond purchases quickly

But the Fed minutes showed a growing concern that the unwanted price pressures could last for a longer tie and the Fed should be prepared to move to reduce bond purchases more quickly or even start raising the Fed’s benchmark interest rate sooner to make sure inflation did not get out of hand.

“Various participants noted that the committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the committee’s objectives,” the minutes said.

The Feds policy rate was cut to a record low of 0 per cent to 0.25 per cent in the spring of 2020 as the Fed focused its efforts on keeping the Covid recession from spiralling into a deeper downturn.

The Fed will next meet on December 14-15 and some private economists said the central bank may decide to send a stronger signal at that time of the Fed’s intentions to address the economy’s jump in inflation.

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Gold steady as inflation woes offset firmer dollar, yields, BFSI News, ET BFSI

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Gold prices steadied on Tuesday, after rallying to a five-month peak in the previous session, as concerns over broadening inflationary risks kept bullion’s safe-haven appeal intact in the face of a stronger U.S. dollar and elevated bond yields.

FUNDAMENTALS

* Spot gold was flat at $1,862.81 per ounce, as of 0140 GMT. U.S. gold futures were also flat at $1,866.80.

* Richmond Federal Reserve President Thomas Barkin said on Monday the U.S. Fed will not hesitate to raise interest rates if it concludes high inflation threatens to persist, but that central bank should wait to gauge if inflation and labor shortages prove to be more long-lasting.

* Rate hikes tend to weigh on gold as higher interest rates raise the non-yielding metal’s opportunity cost.

* Bank of England Governor Andrew Bailey said he was very uneasy about the inflation outlook and that his vote to keep interest rates on hold earlier this month, which shocked financial markets, had been a very close call.

* Tightening monetary policy now to rein in inflation could choke off the euro zone’s recovery, European Central Bank President Christine Lagarde said on Monday, pushing back on calls and market bets for tighter policy.

* Pressuring bullion, the dollar index held close to a 16-month high and benchmark U.S. 10-year Treasury yields were near a three-week peak.

* A stronger dollar makes gold more expensive for buyers holding other currencies, while higher yields increase the metal’s opportunity cost.

* Speculators raised their net long gold futures and options positions to 146,319 in the week ended Nov. 9, the U.S. Commodity Futures Trading Commission (CFTC) said on Monday.

* Spot silver was steady at $25.04 per ounce. Platinum fell 0.1% to $1,085.54 and palladium dropped 0.6% to $2,142.19.

DATA/EVENTS (GMT) 0700 UK ILO Unemployment Rate Sept 1000 EU GDP Flash Estimate QQ, YY Q3 1330 US Retail Sales MM Oct 1415 US Industrial Production MM Oct



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Deutsche Bank CEO calls on central banks to fight inflation, BFSI News, ET BFSI

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Central bankers must change course to fight accelerating inflation, Deutsche Bank Chief Executive Officer Christian Sewing said on Monday.

Sewing, speaking at a banking conference, said he didn’t share the opinion of central bankers that inflation increases were temporary.

“I think monetary policy must take countermeasures here – and sooner rather than later,” Sewing said.

“The supposed panacea of recent years – low interest rates with seemingly stable prices – has lost its effect, and now we are struggling with the side effects,” he said.

(Reporting by Tom Sims and Frank Siebelt Editing by Paul Carrel)

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Analysts, BFSI News, ET BFSI

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New Delhi, Nov 7 (PTI) Global trends, the last batch of Q2 earnings and domestic macroeconomic data will dictate terms in the equity market, which had an extended weekend last week, analysts said. “FIIs’ behaviour along with inflation numbers from US and China will remain key factors for this week. After an extended weekend, Indian markets are likely to start a fresh week with a positive note on the global backdrop.

“However, there is a risk of selling pressure at higher levels as we are underperforming the global peers where the near-term texture has changed to ‘sell on rise’ from ‘buy on dip’,” Santosh Meena, head (research) at Swastika Investmart Ltd, said.

He added that markets will remain busy dealing with global macro numbers where US inflation numbers that are scheduled on November 10 will be the most critical one, whereas China will also announce its inflation numbers on the same day.

On the domestic front, IIP data will be released on November 12.

Stock-specific movement will be seen as the market is heading for the last batch of Q2 earnings where Muthoot Finance, Britannia and M&M are among the key numbers, he added.

“This week, participants will be closely eyeing macroeconomic data i.e. IIP and CPI inflation on November 12. Indications are in favour of further consolidation but the range could be broader this week,” Ajit Mishra, vice-president (research) of Religare Broking, said.

On the earnings front, some of the prominent companies like BHEL, IGL, M&M, ONGC and Tata Steel will announce their results along with several others, Mishra added.

Last week, the BSE benchmark gained 760.69 points or 1.28 per cent.

A special one-hour Muhurat trading session was held on Diwali (November 4) to mark the beginning of the traditional Hindu calendar year, called ‘Vikram Samvat’.

Markets were closed on Friday on the occasion of ‘Diwali Balipratipada’.

“The United States and China’s inflation figures will influence global markets. As long as inflation remains a concern, even D-Street investors will closely monitor domestic inflation rate,” said Yesha Shah, head (equity research) at Samco Securities.

A slew of significant economic data releases and the ongoing earnings season, the volatility experienced last week is expected to persist this week also, Shah added.



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Gold inches lower on dollar uptick; focus on key central bank meetings, BFSI News, ET BFSI

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– Gold prices edged lower on Tuesday, weighed down by an uptick in the dollar as investors eye upcoming key central bank meetings this week.

FUNDAMENTALS

* Spot gold fell 0.1% to $1,805.96 per ounce by 0116 GMT. U.S. gold futures was flat at $1,806.60.

* On Monday, the metal rose nearly 1% to a high of $1,809.66, only about $4 shy of an over one-month peak scaled last week.

* The dollar rose 0.1% on Tuesday, recovering from a near one-month trough hit during the previous session. A stronger greenback makes gold more expensive for buyers holding other currencies. [USD/]

* Benchmark 10-year U.S. Treasury yields were also a tad higher at 1.6431%, raising non-interest bearing gold’s opportunity cost. [US/]

* Market participants eye meetings from the Bank of Japan and the European Central Bank (ECB) on Thursday. Neither of the central bank is likely to announce a change in policy, though the ECB might address how inflationary pressures could affect policy.

* The U.S. Federal Reserve and the Bank of England are also set to meet next week.

* Bank of England interest rate-setter Silvana Tenreyro said she needed more time to judge how the end of the government’s job-saving furlough scheme was affecting the labour market, adding to signs that she sees no urgency to raise rates.

* Gold is often considered an inflation hedge, though reduced stimulus and interest rate hikes push government bond yields up, translating into a higher opportunity cost for holding bullion which pays no interest.

* Spot silver fell 0.1% to $24.53 per ounce. Platinum edged 0.1% down to $1,056.35 and palladium gained 0.2% to $2,055.16.

DATA/EVENTS (GMT)

1400 US Consumer Confidence Oct

1400 US New Home Sales-Units Sept

(Reporting by Nakul Iyer in Bengaluru; Editing by Rashmi Aich)



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BofA survey shows fund managers worried about growth expectations, BFSI News, ET BFSI

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Mumbai: The latest monthly survey by Bank of America Securities showed fund managers are increasingly worried about growth expectations, China and stagflation.

Cash levels are at a one-year high while growth expectations are the weakest since April 2020, the survey showed.

According to the survey, 6 per cent of fund managers believe global growth will weaken in the next one year while 15 per cent said profit growth will slow. Predictions of a ‘boom’ have dropped to 61 per cent while that of stagflation have risen to 34 per cent, said Bank of America Securities.

Around 85 per cent of the fund managers surveyed expect higher short term rates and pencil one Fed rate hike for 2022.

Short China was the most crowded trade, the survey showed.

The survey also showed that inflation, China and COVID-19 were the biggest risks.

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Bond yields trend higher despite softer inflation

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Benchmark yield closed marginally higher this week despite positive inflation data even as rising crude prices, higher US treasury yields and domestic liquidity factor take precedence.

During the monetary policy, the Reserve Bank of India (RBI) halted the G-SAP programme while saying it would increase the quantum of VRRR auctions to Rs6 lakh crore by December.

The central bank last week conducted an 8-day Variable Rate Reverse Repo auction in which the cut-off yield came in at 3.9 per cent. In comparision, the cut-off for a 7-day VRRR auction had come in at 3.61 per cent in the first week of October. The increasing cut-off seems to reflect the central bank’s comfort in paying a higher rate to remove excessive liquidity.

On the positive side, retail inflation dropped to a five-month low of 4.35 per cent in September. Bond market participants are of the view that the next inflation print will most likely come in below 4 per cent due to a favourable base effect. Post that, there could be some rise in inflation, they say.

However, it seems the days when market cheered this sort of news seem to be over, at least temporarily so, as other factors weigh heavily on traders’ minds.

Rising crude price

The halting of G-SAP comes at a time when crude prices are gaining an upward momentum. Brent crude prices closed near the $85-mark last week, having risen by almost $2.5 in a week. To give a context, it has risen by almost $7 / barrel since the beginning of the month.

At the same time, the 10-year US treasury yield touched 1.63 per cent last week, before cooling to 1.575 per cent.

Bond dealers say if both the crude and the US treasury yields continue to rise, it could have an impact on the domestic yields.

Vijay Sharma, senior executive vice-president at PNB Gilts opines that the market is mainly looking at only these two factors.

“Rising crude prices and hardening US Treasury yields are the main factors that are driving the G-Sec yields higher. Under these adverse global conditions, the withdrawal of G-SAP has exacerbated the upmove. The market already knows that the next inflation print would likely come in below 4 per cent given the low base effect. Market participants will be watching out whether at 6.35-6.4 per cent levels, will the RBI do something to stabilise the yields. If crude prices and US treasury yields stabilise, the benchmark bonds could find demand returning at close to 6.4 per cent,” Sharma said.

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Rupee, government bonds gain as mkts cheer sharp decline in CPI inflation, BFSI News, ET BFSI

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NEW DELHI: The rupee gained against the US dollar in early trade Wednesday because of a sharp decline in Consumer Price Index-based inflation for September and as global crude oil prices retreated from multi-year highs, dealers said.

The domestic currency on Wednesday opened at 75.3150 to a dollar, stronger than 75.5060 per dollar on Tuesday. At 10:20 hours (IST), the local unit traded at 75.2675 per dollar.

Data released after trading hours on Tuesday showed that India’s headline retail inflation declined sharply to 4.35 per cent in September versus 5.30 per cent in August.

While domestic retail inflation has been softening over the past couple of months, a recent jump in global crude oil prices had led to fears of fresh upside risks to inflation.

Crude oil prices have climbed to multi-year highs since last week due to concerns of global demand outstripping supply.

Comfortingly for local currency traders, Brent crude futures declined on Tuesday, with the contract for December delivery shedding $0.23 to close at $83.42 per barrel.

“There is a pull-back in crude oil prices which is providing support but the larger positive is the sharp decline in inflation,” a dealer with a large private bank said on condition of anonymity.

“After the kind of depreciation we have seen this month, there is also some dollar selling by foreign banks for exporters. Because they want to lock in a good level. 75.50/$1 was breached yesterday but it is unlikely that RBI will let it go to 76/$1 very soon,” he said.

The rupee has shed around 1.5 per cent against the US dollar so far this month.

Government bonds also gained with yield on the 10-year benchmark 6.10%, 2031 paper last at 6.31%, two basis points lower than previous close, as traders welcomed the inflation print for September.

Bond prices and yields move inversely.

With the fall in headline retail inflation last month providing breathing room to the RBI, bond dealers believe that the central bank may not be in a rush to commence raising interest rates.

“After the last policy statement (on Friday), there was a lot of talk about how the reverse repo rate will be raised in December, I think RBI could stretch it out till February, given that inflation so far is behaving itself. The only joker in the pack is oil prices,” a dealer with a large foreign bank said on condition of anonymity.



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RBI more convinced about transient inflation than others, BFSI News, ET BFSI

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With the US Federal Reserve and the Bank of England hinting at normalisation, factoring in a more enduring nature of the ‘transient’ high inflation, RBI’s statement appears more dovish in comparison. If indeed the duration of high inflation is longer, RBI may need to re-think its GSAP purchases and start normalising the extant liquidity deluge, which has risen to 5.4 per cent of banks deposits.

Possibly, the enlargement of variable rate reverse repo (VRRR) auctions is a precursor to such a scenario. The litmus test for how transient the inflation spike is lies in the resolution of global supply chain issues, particularly in developed economies, which explains a significant part of high prevailing inflation.

‘Inert’ growth weighs: RBI’s policy announcement on Friday, while keeping policy rates unchanged (reverse repo rate at 3.35 per cent and repo rate at 4 per cent), remains weighed by growth-revival imperatives, which are still ‘nascent and hesitant’ in the context of the impact of Covid Wave 2 as well as potential future waves. The demand condition is seen as inert despite normalisation from the impact of Wave 2 and improved 12-month-forward consumer sentiment.

While corporate performance has been good over the past 12 months, investment demand is anaemic. Pricing power in the manufacturing sector is feeble amid rising raw material costs and rising global commodity prices are a risk to growth outlook.

Pre-emptive action can kill the nascent revival: Given growth concerns, RBI has chosen to look through the recent spike in headline CPI inflation (reached 6.3 per cent in June 2021) as it is seen as transient, driven by supply sided factors, elevate domestic fuel taxes, elevated logistics costs, and high global commodity prices. Initiating pre-emptive normalisation of the ultra-easy monetary policy stance based in near-term spikes in inflation could “kill the nascent and hesitant” growth revival.

RBI scales up inflation projection even as growth to in 2HFY22: Overall, RBI has retained real GDP growth projection for FY22 at 9.5 per cent, based on its earlier scaled-down expectation and largely driven by a favourable base effect. The terminal quarter growth is being seen at 6.1 per cent, in Q4FY22, declining from 21.4 per cent in Q1.

The inflation trajectory has been scaled up to an average of 5.7 per cent for FY22, up 70bp from earlier. Importantly, the terminal quarter inflation is being seen higher at 5.9 per cent, accompanying growth deceleration, reflecting the impact of cost-led inflation on growth. The 4 per cent inflation target is now meant to be achieved over 2-3 years.

Easy financial condition the top priority: Thus, RBI’s stance to sustaining its monetary accommodation reflects its prioritisation of comfortable financial and liquidity conditions. Despite the higher projected inflation, central banks have allowed the banking system’s excess liquidity to remain extremely high. The LAF balance has increased further to Rs 8.5 lakh crore, or 5.4 per cent of bank deposits (Aug 4, 2021), up from the daily average of Rs 5.7 lakh crore in June, 2021. The GSAP purchase of G-sec by RBI is slated to continue (Rs 25,000 crore each on Aug 12 and 24, 2021). The only visible change is the progressive expansion of fortnightly auctions of the variable reverse repo rate (VRRR), rising to Rs 4 lakh crore by end-Sept 2021.

Liquidity support extended: Unlike earlier statements, no additional regulatory measures were announced this time. In light of the impact of Covid Wave 2, liquidity support under the TLTRO window has been extended until Dec 31, 2021. Likewise, the liquidity access potential for banks by dipping into SLR holdings of the G-Sec has also been extended. The resolution framework for stressed accounts that provides resolution based on identified financial performance until March 2022 has been extended to October, 2022. Thus, the liquidity support as an essential tool to ensure systemic financial stability is also maintained.

RBI more dovish than others: RBI’s “whatever it takes” stance crucially hinges on its assumption that the inflation spike will be transient, aligning the views of other central banks including the US Fed and UK’s BoE. Even so, the UK’s BoE has scaled up its inflation forecast by a huge 150bp to 4 per cent by end-2021, which implies that the transitory phase of high inflation will be longer than previously imagined.

Hence, “some modest tightening of monetary policy is likely to be necessary” over the next 2 years to keep inflation under control, as per the BoE. A similar view was expressed earlier by US Fed chairman Jerome Powell. Thus, with the US Fed and BoK indicating QE tapering, RBI’s stance of continuing with GSAP is more dovish. If indeed the duration of high inflation is longer, the RBI may need to think about reducing GSAP purchases and start normalising the liquidity deluge; the distortion created that it is creating in short-term money market rates is cannibalizing bank loan demand Possibly, the enlarged of VRRR auction of Rs 4 lakh crore is a precursor to lower GSAP.



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Why controlling inflation is not the job of the RBI Governor alone, BFSI News, ET BFSI

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In 2021, the focus of policymakers across the globe is to not just recover and sustain growth but also to ensure price stability. Not only emerging economies, but even developed economies are dealing with price pressure. The rising inflation rate has prevented many economies from announcing further stimulus measures. Central banks in some countries have gone for a rate hike even when their own economies have not fully recovered from the pandemic-induced economic crisis.

One of the major contributors for the overall rise in inflation is the surge in commodity prices. Within commodities, rising crude oil prices has burdened oil importing countries including India. In July, India imported $12.89 billion worth of petroleum crude & products (POL). And, in the same month, POL accounted for a share of 27.7 percent of the total imports to the country.

In India, inflation rate, as measured by the Consumer Price Index (CPI), is used as RBI’s monetary policy anchor. Within CPI, fuel and light account for a share of 6.84 per cent. Though the share of fuel in the CPI basket is less than 10 per cent, crude prices have a huge impact on the overall inflation rate. Higher fuel prices have a ripple effect on other commodities. Crude oil is used as a raw material in various sectors, with petrol/diesel used in transportation of goods. When the cost of production goes up, it will be passed on to consumers.

In the current situation, higher prices for goods and services is an additional burden on both the consumers and producers. The Indian economy is still in a nascent stage of recovery. An economy in the recovery stage won’t be able to tolerate a higher inflation rate. Inflation rate in July has cooled off to 5.59 per cent, within the upper tolerance band of 6 per cent. However, we need to closely watch how inflation figures would turn out in the coming months. The fall in the overall inflation rate has been mainly contributed by the decline in food prices. Food inflation declined to 3.96 per cent YoY in July’21 from 5.15 per cent in June’21. Yet, during the same period, fuel and light inflation registered only a marginal decline to 12.4 per cent from 12.6 per cent.

At this juncture, both the central and state governments should consider ways to reduce the burden arising from increasing fuel prices. The RBI Governor has explicitly stated on many occasions the need for coordinated action between the Centre and states on tax reduction on fuel prices. Presently, the central government levies an excise duty of Rs 32.9 per litre on petrol while the VAT levied by state governments vary. A reduction in the excise duty and VAT could lead to an increase in disposable income in the hands of the common man. This, in turn, could improve consumer sentiments and prevent the heating up of the economy.

In India, controlling the inflation rate is not just the RBI’s job. The factors contributing to rising inflation in the country calls for a concerted effort from the central bank and Centre/state governments.



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