3 Numbers: Indian Inflation Upbeat, EUR/USD, U.S. 10-Year Yield
James Picerno | Jul 13, 2015 01:47AM ET
Eurozone leaders are still searching for a solution with the Greece crisis as of midday Sunday, which means that the week ahead could bring a new phase of market turbulence, depending on the outcome.
Otherwise, Monday’s a sleepy day for scheduled economic reports, although the inflation update for India will be widely read for clues on the next phase for monetary policy for what the International Monetary Fund says is the world’s fastest-growing major economy. Meanwhile, keep an eye on EURUSD and the U.S. 10-Year yield, which have turned higher in recent days.
India: Consumer Price Index (12:00 GMT): India’s growth rate is expected to beat China’s for the second year in a row in 2016, according to last week’s update of the IMF’s World Economic Outlook. The latest number projects that India’s GDP will rise 7.5% this year and match the rate in 2016 – comfortably above the forecast for China of 6.8% in 2015 and next year's 6.3%.
But while the current outlook for India is upbeat, there are the usual caveats to consider, including the potential for an inflation problem.
I say “potential” because the trend in pricing pressure varies substantially for India depending on the benchmark. The influential wholesale price index (WPI) has slipped into a mild state of deflation lately, which implies lower interest rates. Indeed, WPI’s year-over-year decline was 2.4% through May.
It’s another story with India’s consumer price index, which is higher by just over 5.0% through May. Today’s update for June is expected to tick up to 5.1%, according to a survey of analysts by Bloomberg. In short, the divide between WPI and CPI isn’t about to narrow any time soon.
The stark difference between the two inflation metrics will complicate monetary policy for the central bank, which has cut interest rates three times so far this year. No one’s complaining in the business community, of course, in part because lower rates are helping India’s corporate sector manage its heavy debt load, which has weighed on profit margins. No wonder that there are calls for more rate cuts. But that may be difficult with CPI at 5%-plus ... and rising?
Some economists say that the solution is to use more than one inflation measure to guide policy. But the market seems to be inclined to focus on CPI’s higher inflation at the moment. Apparently in sympathy with CPI's upward trend, India’s 10-year yield turned higher last week, rising to 7.8%. That's up nearly 50 basis points from the start of the week, according to Bloomberg data.
If today’s CPI release shows inflation is running hotter than expected, the trend of higher yields (and lower bond prices) may have more room to run this week.
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EUR/USD: I noted last week that additional clarity on Greece might help stabilise the euro, particularly if the news was relatively encouraging. My reasoning: the modest recovery that’s been bubbling in the Eurozone in recent months remains intact to date.
Fast forward a week and we find that Greece has submitted a new set of reform proposals, although it's unclear if this will suffice to bring a degree of resolution. But if Greece and its European creditors can find enough common ground to work out a deal, the Eurozone's relatively positive macro trend will return to centre stage and cast a bigger influence over market sentiment.
That’s the implied message in Friday’s second-quarter GDP estimate for the update. If the prediction holds, the rise will mark the strongest quarterly advance since 2011.
Perhaps, then, it’s no surprise that EURUSD has firmed in the days after touching an intraday low of just over 1.09 on July 7, when the outlook for the Greek crisis appeared considerably darker. But a few days has made a considerable difference, boosting EURUSD to roughly 1.11 as of midday Sunday.
It’s anyone’s guess if we’ll see a genuine solution with Greece in the days ahead. As I write, the tortured negotiations are ongoing but laden with a fresh round of uncertainty. This much is clear: any good news on this front will likely serve as a reminder that there’s a Eurozone recovery under way.
That may not be the basis for a sustained rally in EURUSD, but it’s enough to keep the euro's bears on edge … assuming that there are no more jokers in the deck with matters over Greece.
U.S. 10-Year Yield: Interest rates bounced back late last week, partly because of lower Grexit risk. That could quickly change if the latest run of Eurozone negotiations fail.
Meantime, the US economic outlook still looks decent if unspectacular. The Atlanta Fed’s GDPNow model projects second-quarter growth of 2.3% when the government publishes its initial estimate later this month. The forecast looks middling, but the advance represents the highest 2Q estimate to date for the GDPNow model. With nearly three weeks to go before the official number is published, it’s possible that the forecast will continue to rise.
That’s a plausible if still-uncertain possibility, or so one can argue based on the recent firming of the benchmark 10-year Treasury yield. This key rate rose to 2.42% at the end of last week, reversing the sharp slump in previous days that pushed the yield below 2.2% at one point last week, based on Treasury.gov data.
Meanwhile, Federal Reserve Chair Janet Yellen on Friday said that: "I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalising monetary policy."
Those plans could change, she added, depending on how the incoming data stacks up in the weeks ahead. But for the moment, it's reasonable to project that moderate growth will prevail. If the news regarding Greece is even mildly positive, it's likely that the 10-year yield will creep closer to 2.50% (and beyond?) in the days ahead.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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