Scanningtheminutesandoptimisticforecasting

In India this week there will be two data points which will be keenly watched, the first one is the outcome of the MPC meeting which we will get to know tomorrow and the second one is about the rising covid numbers. After a phase of surprisingly low new infections, the numbers have surged dramatically. The daily new additions on 1^st Feb 2021 in India were around 8000, on 4^th April the daily new cases stand around 103 000. A 13-fold increase. This has prompted renewed restrictions on economic activity in the form of night curfews, early closures of shops etc.

Spike in covid numbers is surely supposed to find a bearing on the MPC decision. Readers would do well to remember that the last MPC meeting was held on February 3-5, just around the dates when the new case numbers were coming in very low. Hence it would be interesting to re-read the minutes of the Feb MPC meeting to understand how the members were seeing the economy at that time and whether they were factoring in an acute resurgence in covid cases (as one of the possible scenarios) while making their assessment of the future.

A quick word check tells us that in the minutes document the word “covid” appears 16 times where 5 times it is preceded by words like reduction, waning, fall or decline. Two times it gets preceded with words like rise and spike. The word “vaccine” appears 4 times whereas the word “virus” appears 3 times in the document. The word “risk” appears 21 times with 5 times it gets preceded with words like upside or less.  “Growth” appears 50 times whereas “inflation” makes the cut 88 times. The tone of the documents reads as one of optimism. The covid virus was supposedly conquered and overall uncertainty was expected to taper off. The forecasts were also tinged with green as the word “recovery” was used liberally, close to 28 times. But what about now? The British economist John Maynard Keynes once said that “I change my mind when the facts change”. It is expected hence that the tone of the policy makers will be much more cautious and sober this time round and they will acknowledge the return of uncertainty in its full glory. In terms of a decision, the ultra-accommodative monetary policy will stretch further into the future. The rates in the OIS market have been coming down of late indicating that market has started positioning for that. The 10-year yield has opened around 6.12.

Globally the stock markets continue their good run, Dow Jones closed around its all-time highs yesterday. Hang Seng is trading up by 2% in the morning trade. The US yields are down, 10-year is trading at 1.68 and Dollar Index is trading below 93 levels. Emerging market currencies are either stable or have strengthened against the USD with the South African ZAR clocking close to a 1% gain yesterday. The Rupee opens stronger around 73.22 levels. Brent oil trades around 62.50$/bbl. The overall mood appears to be risk on. On the Fed front, the minutes of the last FOMC will be due tomorrow and Chief Powell is supposed to make a public address on an IMF panel on Thursday. The public will parse the statements keenly to see if “recovery” trumps “risk” during the word check.