Oct 12 2018

Trump Yelling Is Powell Listening!

If he does not like it, he makes it amply clear. Yes, Trump is the kind of personality who will not shy away from making his feelings public. He will shout, scream, yell, appear animated and tell the whole world that he is not happy with Fed decision. In a very recent interview, he said, “Fed is too aggressive. They are making a big mistake. I am paying interest at a high rate because of our Fed. And I’d like our Fed not to be so aggressive because I think they’re making a big mistake”. To which Fed defends itself by saying “the gradually rising rates are meant to guard against any quick run-up in inflation, while remaining low enough so far for the recovery and a strong run of job growth to continue”.
It is widely believed, and strongly as well, that threat of an aggressive rate hikes in US shakes the entire global markets. We saw a glimpse of it in the crashing US equities and in the rest of the world. Investors have been dumping U.S. bonds in the last few weeks on fears that domestic inflation might accelerate and prompt the Fed to hasten the pace of rate hikes.

Chart: United States 10-Year Bond Yield

Recent sharp increase in US bond yields were driven by positive economic data. This also indicates the Fed will most likely increase rates in December and beyond. The yield on the benchmark US 10-year note rose to a seven-year high of 3.26% on 9th October. However, it has come down to 3.16 % at the time of writing. Bond yield at 3.16% is the immediate casualty of the headline US consumer price index coming in at 0.1 %, short of the 0.2 % anticipated and following August’s 0.2 % gain. Though the CPI came in softer than expected, it is unlikely to impact market expectations for a fourth rate hike from the Fed this December.
In the context of Indian market, a rising US bond yield is likely to cause huge volatility and ripples as we have a free falling Rupee, threat on maintaining the targeted fiscal deficit, about INR 62,000 crs of FIIs outflows since January 2018, deteriorating CAD. Also, with some of the Indian states going to polls in November/December the turbulence, uncertainty and volatility is likely to test the nerves of even the best and smartest in the game. Caution, Caution, Caution, with capital C is the term to keep referring for Indian investors in particular in the near term.