Volatilemarkets,commonthreadandRicardo'sinsights

As a routine we will start the markets round up by taking a look at the equity market levels. Dow Jones ended in negative yesterday. Hang Seng and Nikkei are trading down close to 2.7%. Indian stock markets are also trading in red after having a bumper day yesterday. Now coming to the yields, US yields have again inched up. The 10-year is trading at 1.48%. The Indian 10-year yield is trading at 6.25%. On the currency side, also some tumult is visible with the Dollar Index above 91 and Japanese Yen below 107 level against the Dollar.

Markets will now be looking at Fed Chief Powell’s speech today at a WSJ event where he is expected to make his views public about the last week bond rout. In his testimony to the law makers last week he had tried to assuage the market that the accommodative stance will continue for long but even post that bond markets got roiled. It is expected that he might indicate a new tool in the kit. On the data front the US private payroll data for the month of February came below expectations. The next set to look out for will be the Initial jobless claims due to be released today and an all-important NFP report due tomorrow.

It is interesting to note that how all these various factors like jobs, inflation, output, yields, currency are intertwined deeply across the globe where a job report in the US impacts the Japanese currency and South African yields in equal measure. So, let’s try to declutter and identify the thread which combines them all. It turns out we can seek some help in the work of eighteenth-century economist David Ricardo. Ricardo formulated the theory that all the disparate factors playing in the economy can be distilled to action of one primary player and that is called the “Consumer”. He improved on the prior theories in which land and its usage was the centrepiece of economy.

As per Ricardo, the consumer and his/her changing choices are the bedrock of all the economic activities. The relative price increase nudges the consumer to change the choice of goods, increasing the demand of some goods more than others. The aggregate price increase (aka the generalised inflation) again impacts the consumption pattern and rate of savings. The yield in the economy brings about the temporal aspect in the consumer’s decision making. How much one should be paid for delaying the consumption. And finally, the currency exchange rates tie the prices across the globe and try to bring in the equilibrium of purchasing power of consumers across countries. In the current world all of these linkages are much more ingrained and amplified. The communication and trade revolutions have brought the consumers of the world together.