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| Edited By: N S Venkatesh |Source: DNA |Updated: Mar 22, 2018, 04:14 AM IST
The year 2017 started calmly as markets opened flat. The first and much keenly awaited data point – the Non-Farm Payroll Report from the US – was expected to provide much of the direction for global markets, for weeks ahead. Indian markets moved out of the seven-week long demonetization drive, which may go down as a watershed moment. The currency ban ended on 30th of December with the old Rs 500 and Rs 1000 rupee notes becoming a numismatist's delight memorabilia.
In overseas markets, the December payroll data – the last full-month data under Obama administration was a mixed bag. The headline payroll print was far below market expect (at 156,000 against 178,000 of expectation) and unemployment rate rose to 4.7% (against 4.6% previous month). However, the healthy upward revisions to the November data point and the surprise jump in average hourly earnings (the best since 2009) will likely keep the stated rate-trajectory dots in place. A critical assessment of the details of the headline number, suggests new jobs were largely created in low-quality avocations and not in managerial cadres, and this should temper any bullish overtures. Dow Jones Index sharply rallied and fell shy of the 20,000 mark by less than half-a-point. US Treasury yields inched higher in response. The positive sentiment should spill over to the Asian markets in the coming week. The minutes of the Federal Open Market Commitee meeting also brought in some uncertainty regarding the pace of rate hikes.
In other international developments, China occupied much of the market attention with two way volatility in the yuan, something unfamiliar. For calendar year 2016, the Chinese yuan weakened by 6.6% against the US Dollar, its single biggest annual loss after 1994. This was further corroborated by the weekend reserves data published by People's Bank of China, that showed the central bank drained nearly $41 billion to defend its currency. And, OPEC output cut took effect with Saudi Arabia leading the way. Libya continues to supply the same as before
Indian markets started with hopes of some progress in the ongoing GST council meetings and with the contentious dual-control issue yet again unresolved in the end. The Reserve Bank of India (RBI) announced a downward revision to its Q4 borrowing calendar by Rs 18,000 crore on the back of stronger tax collections. RBI also announced that it would soon release complete reconciled data on the collection of specified bank notes under the demonetization scheme.
The weekly auction on Friday saw devolvement in the long tenor papers, which was a surprise given good demand at bidding stage. The auction however went well with robust bid-to-cover ratio. As the cash management bills issued to manage the short term liquidity from November mature and banks get clarity on the retention percentage of the newly mobilised low-cost funds, bond markets will get better direction
The week that went by was also notable for big rate cuts by commercial banks – a signature statement that the pass-through of repo-rate cuts has finally happened. The borrowing fraternity will sizeably benefit from this rate war and banks may lower deposit rates further to manage existing margins. The quick estimates for GDP numbers also confirmed the downward growth projections to 7.1% though it has not factored the spillover and secondary-round effects of demonetization.
Benchmark bond yields remained flat within the 6.35-6.45 range awaiting US data. With focus moving to CPI release, domestic markets will position for a strongly possible rate cut in February if inflation numbers come benignly. Expected range 6.25 to 6.35 with a bullish bias.
The writer is executive director, Lakshmi Vilas Bank
