FedMinutesandOrwellianEquality

The important data release for today will be the US Fed minutes from the meeting which was preponed as an emergency response to cut the Fed rate by 100 bps. The minutes will provide details on what the policymakers were thinking and how deep and structural the problem is as per their assessment. But in the extreme times where we are living currently, the assessment made 3 weeks back has already lost much of its relevance. A quick glance on the CDC site for the date wise infection number tells us that on the policy date of 15th March, the total number of reported cases was 3487. The number currently stands at 374329. A rise of 24% compounded daily. It will be interesting to see how on the mark they were in terms of assessment.

As for the stock markets, the bumper rally has taken a pause. The US stocks which were flying high during the trading ended in a slight negative. Indian stocks had a historic day where the benchmark indices ended the day with a 8% gain. In a change of trend, the FPI’s were net buyer in the equity markets yesterday. Indian rupee has opened at 75.80 in the trade today whereas the 10 year benchmark bond trades at 6.42 in the opening. Dollar Index trades at 100.16, 10 year US yield at 0.72, Chinese Offshore Yuan at 7.07 and Brent Crude first month contract at 32.6 $/bbl and gold at 1648$/oz.

In an important announcement yesterday RBI released a set of revised regulations for the hedging facilities for resident and non resident entities. The directives build on the draft regulations which were issued earlier.

Few days back we had referred to a famous quote from George Orwell’s Animal Farm that “all animals are equal but few are more equal than others”. The quip was made in the context of effectiveness of the medical response to the epidemic outbreak. The primary thought was that centralized decision making would score over a more egalitarian and collaborative model. As the contrast in number of cases between US and China have emerged, the Orwellian statement appears correct.

But let’s change the context and see the statement in the light of fiscal response rather than in terms of medical one. Here also the statement appears correct. In response to the economic shock brought out by the outbreak almost every country has been forced to bring about a stimulus package. The reality of announcing such a package is that it needs to be funded. In normal times a fiscal action needs to be countered with a tax increase or spending cuts elsewhere. But in exceptional times like these only the borrowing remains a just option. Now those countries which can borrow efficiently in their own currencies will end up doing much better than the one’s which depend on FC borrowing. Here also US will emerge as a special case. US already has a 23 Trillion Dollar debt on its books and it has announced one of the most aggressive stimulus program of close to 2 Trillion USD with promise of more to come. The US yields in the wake of these announcements have not jumped showing enough signs that market is ready to absorb the new debt issuances. Promise by Fed of purchasing treasuries has helped in ample measure too. The limited point being that not all countries will experience similar response to their bond yields. As the foreign holders of the debt become queasy the bond yields will eventually inch up.