Calmmarkets,PEPPpurchasesandCharlesPierce

The story for today goes like this. Stock markets are up, yields are down, emerging market currencies have strengthened, and the Dollar index has retreated. The US yields are trading at 1.54 which has gone till 1.4750 yesterday. The Dollar Index is at 91.54. The Indian rupee has pulled back to 72.70 levels now with the South African ZAR showing a move to 14.90 levels from 15.50 levels on Tuesday. Other emerging market currencies like IDR, THB etc have also shown similar gains.

So, what is aiding this optimism? Firstly, it looks that markets liked what the ECB Chief Christine Lagarde had to say regarding ECB’s fight against the pandemic and rising yields. The bond purchases under the PEPP program over the next quarter will be done at a significantly higher pace than during the first months of this year. However, the total size of the PEPP program was left unchanged. More money quickly! On the US data front, the weekly jobless claims number came in better than expected. Initial claims fell more than 42k on a weekly basis to stand at 712k signalling an economy which is on its way of reopening. Finally, after a lot of debates and delays, the covid relief cheques are slated to start getting dispatched from next week. The 1400 USD benefit money to the eligible US residents will form the bedrock of the next wave of consumer spending. Domestically we had the announcement of another instalment of special OMOs on Wednesday by the RBI. The simultaneous sale and purchase of the aggregate amount of 10k Cr INR will be held on 18^th March. The 10-year yield is currently trading at 6.23. Today will also see the release of CPI data for February post the market hours.

Daily we start the day by looking at various market parameters, stocks, bonds, currencies, gold, crude etc and given their absolute and relative performance, we try to formulate the most plausible reasoning for the same. Some days the reasoning can fit the events perfectly and some days it lacks the coherency which is required for it to be widely accepted. But in both the cases the correctness of the reasoning remains equally specious.

Charles Sanders Pierce a nineteenth century American philosopher distinguished three broad styles of reasoning. First one is Deductive which essentially reaches logical conclusions from stated premises. You believe that X leads to Y and Y lead to Z, hence X leads to Z. Voters of a particular theological belief vote for a particular political party. That party won, so those people voted for it. The second form of reasoning is inductive, it seeks to generalise from observations. It may be supported or refuted by subsequent experience. For example, in the times of economic stress there is a strong wave of anti-incumbency. This is something which has been seen to be true as per the observations/data which we have till now.

The third form of reasoning as per Pierce is the Abductive reasoning. This kind of reasoning provides the best explanation of a unique event. In our case the kind of reasoning and narratives which we provide daily very closely resembles the abductive form. Markets show a particular behaviour and then we will scramble to gather the best possible explanation. PEPP purchase and stimulus cheques provide the reasoning for today’s optimism. In a world full of radical uncertainty, it turns out that the abductive reasoning becomes indispensable and our understanding seeped in inductive (inference based) or deductive (dogma based) becomes less useful.