Economicreopeningandthealphabetsoup

The Dow Jones fell by 0.45% in the yesterday’s trade. Indian stock markets fell by close to 1.3%. Attributing every move in the markets to a specific cause is an approach fraught with logical inconsistencies because many a times the same cause can result in a completely different outcome. Let’s see the example of the US job report which came out on Friday. Report numbers, which were one of the worst since the report inception in 1930’s, were followed by a surge in the stock markets. Some innovative reasoning had to be devised post facto.

The news which has been keeping the markets of all hue (i.e. stock, currency and debt) busy, has been the discussion around the reopening of the economies. Analysts have discovered a complete alphabet soup to describe how the potential recovery would look. A sudden rebound is described by alphabet V. A more gradual recovery is represented by U. An even more enlightened pattern is described by the letter W representing a double dip. We can also try our hand in adding to this list… what if the recovery looks like the letter S which essentially represents a more humble trajectory of unknowability.

But apart from these alphabet letters there is one more which will be an important one to track as the world tries to find its way back. This one is denoted as R0 - the basic reproduction number of a viral disease. The number is useful in predicting how the disease will spread. R0 above 1 represents that one infected person will infect more than one person, which essentially means that in the absence of measures like quarantine or vaccines, ultimately the entire population will get infected. The current lockdown measures were to bring the number below 1 but sadly the lockdown measures can’t be in place permanently.

In Germany, which has been one of the success stories in virus containment, this number has again gone above 1 as of yesterday indicating that the country risks a second wave of infections as it reopens. Ultimately V,U,W or S all would depend on how we are able to tackle R0.

In other news the Indian bonds suffered damage in the opening trade yesterday when the market opened post the news of extra government borrowing. The old 10 year benchmark bond which closed at 5.97 on Friday went to 6.21 during the day. It currently trades at 6.17. The Indian rupee trades at 75.90 currently.

The US 10 year bond trades at 0.69 and 2 year trades at 0.17. Last week the 2 year was trading close to 0.10 as the clamour regarding the negative interest rate heightened. Yesterday, Chairman of Atlanta Fed, Raphael Bostic remarked that negative rates are among the weaker tools in the tool kit and he is not a great fan of the approach. Bets on the rates as represented by CME Fed funds futures market still reckon that the NIRP is very much on the table as contracts beyond April 2021 are trading above 100 representing a below zero rate.

On the data front we will have the CPI (April) and the IIP (March) data in India today. The CPI is expected to read around 5.85 but as the correlation between the CPI print and consequent monetary policy action is low given the pandemic, the print is expected to pass without a whimper.