Fed rate cut with a guidance of data dependent policy moves will remove some nervousness in markets on worries of recession and disinflation. The US economy is still adding jobs and incoming data is not weak enough to cause growth concerns.
The inversion in the UST yield curve had caused worries on recession but the recent back up in both 10 year and 30 year UST yields that have risen by 30bps from lows is indicating that markets are not as concerned on recession at present. This will come as a relief for markets globally including India, which is undergoing its own economic issues.
U.S. Federal Reserve lowered its main interest rate for a second time this year and Chairman Jerome Powell said that “moderate” policy moves should be sufficient to sustain the U.S. expansion. However, the Fed continued to remain accommodative and its future policy action will be data-dependent.
The Fed cut its benchmark rate by a quarter percentage point to a range of 1.75% to 2% citing that “Weakness in global growth and trade policy have weighed on the economy.”
Treasury yields rose, the USD rallied and U.S. stocks reversed earlier losses after Powell made clear that policymakers did not expect the need deep rate cuts.
DXY (USD Index)
ECB Policy
ECB stimulus is positive for INR Bonds as bond yields are at low levels globally and many of the European bond yields are trading in negative territory while yields in emerging countries like India are still at higher levels. Global liquidity will flow into emerging countries like India where interest rate differential is in favor, however, the risk aversion and economy need to stabilize.
The ECB on 12th September 2019 has announced its biggest package of a rate cut and economic stimulus in three years. The ECB cuts interest rates by 10 basis point to -0.5% and announced open-ended QE of euro 20 billion per month starting 1st November. The central bank downgraded its inflation and growth forecast, also introduced a reserve system that would exempt part of bank holdings from negative rates. President Mario Draghi has also warned governments that they needed to act quickly to revive flagging eurozone growth.
The decision by the ECB initially pushed the euro lower, but that was shortlived as the euro ended the day higher by 0.5% against USD and is currently trading at 1.1065.
