Federal Reserve Governor Lisa Cook. File
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A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad.
| Photo Credit: REUTERS

The rupee appreciated 10 paise to close at 83.87 (provisional) against the American currency on Thursday (August 29, 2024), supported by easing crude oil prices and a firm trend in domestic equities.

Forex traders said the market is awaiting cues from the U.S. GDP and the U.S. Personal Consumption Expenditure (PCE) inflation data, as this data point is crucial since it could sway the Federal Reserve’s decision on whether to implement a 25 or 50 basis point rate cut at its September meeting.

At the interbank foreign exchange market, the local unit opened at 83.92 and touched an intra-day high of 83.84 against the U.S. dollar.

The domestic currency finally settled at 83.87 (provisional), 10 paise higher from its previous close.

On Wednesday (August 28, 2024), the rupee depreciated 4 paise to close at 83.97 against the American currency.

According to Jateen Trivedi, VP Research Analyst, Commodity and Currency, LKP Securities, the rupee gained 10 paise, as expectations of interest rate cuts continue to provide support, preventing the rupee from falling below 84.00.

“The strong demand around 84.00 keeps the rupee buoyant, with resistance seen at 83.75. The rupee is expected to trade in a positive range between 84.00-83.70,” Mr. Trivedi said.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, was trading 0.11% higher at 101.20.

Brent crude, the global oil benchmark, declined 0.34% to $78.38 per barrel.

On the domestic equity market front, Sensex rose 349.05 points, or 0.43%, to close at 82,134.61 points. The Nifty closed 99.60 points, or 0.4%, up at 25,151.95 points.

Foreign institutional investors (FIIs) were net sellers in the capital markets on Wednesday, as they offloaded shares worth ₹1,347.53 crore, according to exchange data.

 PBC is worried about unwinding of speculative short yuan positions
| Photo Credit: REUTERS

Having spent all year putting a floor under the tumbling yuan, China’s central bank is suddenly faced with the opposite problem and is turning to subtle ways to stop the currency from appreciating sharply.

The usually restrained yuan has strengthened 1.3% against the dollar in August, recouping nearly all its losses in the first half of the year. On Friday, it looked set for its fifth straight weekly gain, the longest winning streak in more than three years.

While none of the underlying drivers at home — a weak economy and capital flight has changed, the yuan has been helped by growing bets for Federal Reserve interest-rate cuts, which are weakening the dollar, and by a rally in the Japanese yen.

Meanwhile, Chinese authorities have worked behind the scenes to ensure the currency doesn’t spike abruptly, which could roil fragile domestic financial markets and hurt exporters. They surveyed the market to gauge the pressure, and quietly relaxed restrictions on gold imports and trading positions in the yuan for some banks.

‘Wary of volatility’

“The government is less concerned about depreciation but remains wary of FX volatility,” said Gary Ng, senior economist for Asia Pacific at Natixis.

“While the pressure on the yuan may ease as the Fed may finally cut interest rates, there may be sudden and significant movements in capital flows.”

One reason for the People’s Bank of China (PBOC) to be worried is the build-up of speculative short yuan positions during the currency’s steady decline since early 2023, which could be unwound messily if the currency rises fast.

Foreign firms operating in China, domestic exporters and investors have swapped yuan for dollars to earn better returns in what is known in the markets as yuan carry trade.

Analysts at the Macquarie Group estimate exporters and multinational companies have accumulated foreign currency holdings of more than $500 billion since 2022.

“As the yuan appreciates… concerns about the potential unwinding of yuan carry trade and shocks to financial markets may arise,” said Zhu Chaoping, global market strategist at J.P. Morgan Asset Management.

China’s currency regulator, the State Administration of Foreign Exchange (SAFE), and the PBOC have not yet responded to Reuters requests for comment.

Prevent stampede

Possibly to get an idea of pent-up yuan buying that could come as the currency appreciates, SAFE surveyed banks about their clients’ FX conversion ratio — the proportion of revenues exporters convert into yuan — last week, two people told Reuters.

“FX settlement is the issue that everyone in the market is mostly concerned about, besides the Fed rate cut,” said Liu Yang, general manager of the financial market business department at minerals exporter Zheshang Development Group.

“After all, exports are the only major driver of China’s economy among its traditional ‘troika’ (traditional growth engines), and regulators do not want the yuan to appreciate rapidly and substantially weaken the competitiveness of export products.”

Also, guidance given to banks last year banning them from keeping short yuan positions at the end of a day’s trading has been relaxed for some banks, two people told Reuters.

Chinese banks have also been given new gold import quotas by the central bank. Gold imports are usually curtailed when the yuan faces depreciation pressures. The steps are subtle, analysts said, and together with the trend in the PBOC’s daily benchmark guidance setting for the yuan, simply point to a desire to contain volatility, rather than thwart gains.

Federal Reserve Bank Chair Jerome Powell.
| Photo Credit: Getty Images

The prospect of near-term interest rate cuts is bolstering the case for investors to remain bullish after a run in U.S. stocks that may soon be tested by upcoming corporate earnings reports and growing political uncertainty. Expectations that the Federal Reserve will kick off its long-awaited rate-cutting cycle in September remained firm on Tuesday after Fed Chair Jerome Powell told Congress that the U.S. is “no longer an overheated economy,” suggesting that the case for easing monetary policy is growing stronger.

Rate-cut bets have fluctuated sharply throughout the year and have been only one of several factors—along with strong earnings and excitement over artificial intelligence—that have helped the S&P 500 rise about 17% year-to-date. Still, many investors believe increased clarity on when the Fed will begin easing monetary policy and how much it might lower rates in 2024 could provide a buffer to stocks if markets grow turbulent in coming months.

The beginning of rate cuts will signal that “the Fed has the market’s back,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. He expects the central bank to cut rates about six times over the next year. “We think that’s definitely a positive factor both for the markets and the economy,” he said.

Investors late on Tuesday were factoring in an over 70% chance that the Fed will cut rates in September, compared with roughly 50% a month ago, according to CME FedWatch. Fund funds futures are pricing in about 50 basis points of easing in 2024 overall, according to LSEG data.

“The Fed is getting closer to a rate cut,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “I believe we’ll see a rate cut in September and another one in December.”

Challenges ahead

Mr. Powell told the Senate Banking Committee that inflation had been improving in recent months and that “more good data would strengthen” the case for looser monetary policy.

One early test comes on Thursday, with the release of U.S. consumer price data for June. While the last several reports have shown that inflation is starting to cool, a stronger-than-expected number could undermine the case for easing in coming months.

On the other hand, expectations of coming monetary easing combined with easing inflation and still-resilient growth could buoy investor confidence in the face of several potential risks in coming weeks. Corporate earnings kick off in earnest on Friday with reports from major banks and could weigh on the richly valued U.S. equity market if companies fail to deliver on lofty expectations. S&P 500 companies are expected to increase earnings 10.6% this year and 14.5% in 2025, according to LSEG IBES.

Investors are also bracing for the twists and turns in the U.S. presidential election race, after President Joe Biden’s shaky debate performance late last month against former President Donald Trump prompted calls for the incumbent to step aside.

Keith Lerner, co-chief investment officer at Truist Advisory Services, wrote in a recent midyear outlook that he remains positive on U.S. stocks, although he expects markets to trade “in a choppier fashion” following a strong first half.

“U.S. economic growth is now cooling from the post-pandemic stimulus boom, but not weak,” he said. Stocks have typically risen in the six- to 12-month period following the Fed’s first rate cut, as long as the economy avoids recession, Truist’s research showed.

Lower interest rates could also help broaden the equity rally, which has been led by a handful of megacap companies like Nvidia. Only 24% of stocks in the S&P 500 outperformed the index in the first half, the third-narrowest six-month period since 1986, according to BofA Global Research strategists.

Matt Miskin, co-chief investment strategist at John Hancock Investment Management, said lower rates could help areas of the markets that have suffered under higher rates as big tech has soared. That includes small-cap companies, which tend to be more sensitive to interest rates because of their greater reliance on financing. The small cap-focused Russell 2000 is up just 0.1% year-to-date.

“Smaller-cap companies need capital to survive in a lot of instances and this higher cost of capital makes their business really challenged,” he said. “A lower cost of capital would certainly help those companies.”

Of course, rate cuts are not always a signal of smooth sailing ahead and have often come when the Fed is forced to rapidly ease monetary policy due to a deteriorating economy. A study by the Wells Fargo Investment Institute released last month found that the S&P 500 has fallen by an average of 20% in the 250 days following the first cut of a cycle.

Stocks will likely perform well over the next six to 18 months if the Fed cuts rates due to falling inflation, the firm’s strategists wrote. However, “if the Fed is forced to cut aggressively in response to a macro or market disruption, we would expect stock performance to suffer,” the strategists wrote.

Representational image of the seal of the Board of Governors of the United States Federal Reserve System
| Photo Credit: AP

United States Federal Reserve officials will likely make official what’s been clear for many weeks: With inflation sticking at a level above their 2% target, they are downgrading their outlook for interest rate cuts.

In a set of quarterly economic forecasts they will issue after their latest meeting ends, the policymakers are expected to project that they will cut their benchmark rate just once or twice by year’s end, rather than the three times they had envisioned in March.

The Fed’s rate policies typically have a significant impact on the costs of mortgages, auto loans, credit card rates and other forms of consumer and business borrowing. The downgrade in their outlook for rate cuts would mean that such borrowing costs would likely stay higher for longer, a disappointment for potential homebuyers and others.

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Still, the Fed’s quarterly projections of future interest rate cuts are by no means fixed in time. The policymakers frequently revise their plans for rate cuts — or hikes — depending on how economic growth and inflation measures evolve over time.

But if borrowing costs remain high in the coming months, they could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.

The Fed’s updated economic forecasts, which it will issue Wednesday afternoon, will likely be influenced by the government’s May inflation data being released in the morning. The inflation report is expected to show that consumer prices excluding volatile food and energy costs — so-called core inflation — rose 0.3% from April to May. That would be the same as in the previous month and higher than Fed officials would prefer to see.

ALSO READ | Rationale behind raising interest rates

Overall inflation, held down by falling gas prices, is thought to have edged up just 0.1%. Measured from a year earlier, consumer prices are projected to have risen 3.4% in May, the same as in April.

Inflation had fallen steadily in the second half of last year, raising hopes that the Fed could achieve a “soft landing,” whereby it would manage to conquer inflation through rate hikes without causing a recession. Such an outcome is difficult and rare.

But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperiling a soft landing.

In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate. Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought.

Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “several more months of good inflation data” before he would consider supporting rate cuts. Though Mr. Waller didn’t spell out what would constitute good data, economists think it would have to be core inflation of 0.2% or less each month.

Mr. Powell and other Fed policymakers have also said that as long as the economy stays healthy, they see no need to cut rates soon.

“Fed officials have clearly signaled that they are in a wait-and-see mode with respect to the timing and magnitude of rate cuts,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a note to clients.

The Fed’s approach to its rate policies relies heavily on the latest turn in economic data. In the past, the central bank would have put more weight on where it envisioned inflation and economic growth in the coming months.

Yet now, “they don’t have any confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citi and a former top economist at the Fed.

“No one,” Mr. Sheets said, “has been successful at forecasting inflation” for the past three to four years.

Equity benchmark indices declined in early trade on April 12 after a record-breaking rally in the previous trade.
| Photo Credit: REUTERS

Equity benchmark indices declined in early trade on April 12 after a record-breaking rally in the previous trade as investors went in for profit-taking amid weak trends from Asian markets.

The hotter-than-expected U.S. inflation data also hit investors’ sentiment as it reduced hopes of rate cuts by the Federal Reserve.

The 30-share BSE Sensex declined 324.12 points to 74,714.03. The NSE Nifty dipped 96.6 points to 22,657.20.

From the Sensex basket, JSW Steel, Maruti, Asian Paints, ITC, Kotak Mahindra Bank and HDFC Bank were the major laggards.

NTPC, Tata Motors, Larsen & Toubro and Nestle were among the gainers.

In Asian markets, Tokyo traded in the positive territory while Seoul, Shanghai and Hong Kong quoted lower.

Wall Street ended mostly with gains on April 11.

“The hotter-than-expected US inflation has spiked the U.S. bond yields. This is negative for FPI inflows but is unlikely to impact the Indian market which is resilient, and the rally is driven mainly by domestic liquidity,” said V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

From the global equity market perspective, sticky U.S. inflation is a negative since it has reduced hopes of three rate cuts by the U.S., he added.

“But it is important to note that there is a real positive factor in the sticky inflation, and that is the exceptionally strong US economy which is showing no signs of a slowdown, let alone recession. This resilience of the US economy will support earnings growth and, therefore, the US stock market. This favourable backdrop will be positive for other markets, including India,” Mr. Vijayakumar said.

Global oil benchmark Brent crude climbed 0.58% to $90.26 a barrel.

Foreign Institutional Investors (FIIs) bought equities worth ₹2,778.17 crore on April 10, according to exchange data.

“Market sentiments were shaken by the US CPI inflation data, questioning the Fed’s rate-cut plans and prompting a bearish outlook on potential rate cuts for 2024,” said Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd.

Despite this, hopes for robust Q4 corporate earnings and a pre-election rally remain positive catalysts, as reflected in net buying by both FIIs and DIIs, he added.

The BSE benchmark climbed 354.45 points or 0.47% to settle at an all-time high of 75,038.15 on April 10. The Nifty advanced by 111.05 points or 0.49% to reach a record closing peak of 22,753.80. During the day, it jumped 132.95 points or 0.58 per cent to hit a lifetime intra-day peak of 22,775.70.

Stock markets were closed on April 11 on account of Eid-Ul-Fitr.

Representational image only. File
| Photo Credit: Reuters

Equity benchmark indices declined in early trade on September 21, falling for the third day running, due to a weak trend in global markets and foreign fund outflows.

Global equities fell after the U.S. Federal Reserve signalled that they expect to raise rates once more this year to fight inflation.

The 30-share BSE Sensex fell 333.64 points to 66,467.20. The Nifty declined 99.8 points to 19,801.60.

Among the Sensex firms, HCL Technologies, ICICI Bank, Tata Consultancy Services, Larsen & Toubro, UltraTech Cement, Nestle, HDFC Bank and ITC were the major laggards. State Bank of India, Tata Steel, Axis Bank and NTPC were among the gainers.

In Asian markets, Seoul, Tokyo, Shanghai and Hong Kong were trading in the negative territory. The U.S. markets ended in the red on Wednesday.

The Federal Reserve left its key interest rate unchanged on Wednesday for the second time in its past three meetings, a sign that it’s moderating its fight against inflation as price pressures have eased. But Fed officials also signalled that they expect to raise rates once more this year.

“Even though the ‘hawkish pause’ from the Fed was on expected lines, the U.S. markets reacted negatively since the indication from the Fed is that rates will remain ‘higher for longer’.

“For Nifty the biggest drag will be more FII selling in response to the rising dollar and U.S. bond yields,” said V. K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Global oil benchmark Brent crude declined 0.71% to $92.87 a barrel. Foreign Institutional Investors (FIIs) offloaded equities worth ₹3,110.69 crore on Wednesday, according to exchange data.

“A rough start to the trading session is on the cards as overnight weakness in the U.S. markets has triggered a slump in other Asian counterparts after the U.S. Federal Reserve hinted at one more rate hike by the end of this year even as it kept rates unchanged in its FOMC (Federal Open Market Committee) meeting yesterday.

“Another negative catalyst has been the frenzied selling by foreign institutional investors as they sold shares worth ₹3,110.69 crore in the domestic equity markets on Wednesday, which could further dampen the sentiment,” Prashanth Tapse, Senior VP (Research), Mehta Equities Limited, said in his pre-opening market comment.

The BSE benchmark had tumbled 796 points or 1.18% to settle at 66,800.84 on Wednesday. The NSE Nifty declined 231.90 points or 1.15% to end below the 20,000 mark at 19,901.40.