Risingcovidcases,FOMCmeetingandIndianmythology

As the new week starts, all eyes will be on the Fed’s FOMC meeting scheduled for Tuesday and Wednesday. It goes without saying that the Fed statement followed by the press conference and summary of economic projections will be the most important source of market moving information. The statement will start (expected) with a pledge to achieve the Fed goals which are stability, consumer inflation averaged around 2% and maximum employment. Various members of the committee will present when they see the first hike happening in the Fed funds rate which is line with the above objectives. Fed Chief Jerome Powell in his recent media interactions has stressed that the day of reckoning of rate increase appears “long way off” but markets want to know how long is that long. If a few members shift their definition of long from year 2023 to 2022, we can see the selling of bonds both relentless as well as widespread.

Today the 15^th of March also marks the one year from the unscheduled Fed meeting held last year amidst the raging covid spread where it reduced the Fed funds rate from zero to 0.25% range. Now with the benefit of hindsight we know that how momentous that policy action was. Widespread lockdown resulted in contracting economic activity and crippling of normal life, a regime change happened in the US, stock markets firstly crashed only to then reach their all-time highs by the end of the year. Fed and other central banks were hailed for their quick response to the pandemic threat. But now with the markets getting used to the easy liquidity regime, the CBs are faced with a different problem.

In the Indian mythology, there is a war strategy the name of which can be roughly translated in English as a “circular labyrinth” (for the lack of a better translation). The unique point about this strategy is that it is easy to get into but extremely difficult to get out. Drawing on the analogy, the CBs across the world have done the easy part (entry) but the exits will be difficult and painful. The highly globalised nature of modern finance will ensure that when the exit eventually happens the tantrum will be felt across the globe. Even with small indications like the economy is now doing well is expected to return to a growth path has to be couched in the phrases like “however sufficient uncertainty remains”. As of now we are priming ourselves by reading the previous policy texts so that we can identify any change in tone. The US 10-year yield is currently trading around 1.64 which is its near term high.

The Dollar Index is however down from its recent highs of 92.50 resulting in both the Euro and Pound pushing 1.20 and 1.40 respectively. Hang Seng, Nikkei and Dow futures all are trading in green. Indian stock markets are down by close to 1% mostly following the resurgence of covid cases. The weekly increase in the number of new cases has been the highest since October in some cities prompting authorities to resort to lockdowns. The Indian Rupee however stands firm at around 72.70 levels, 10-year yields trade around 6.24. As per the WSS released by the RBI last week the total Fx reserves stood at 580-bn USD for the week ending March 5^th.