Fed holds rates
In the FOMC meet held yesterday, Fed kept rates unchanged while keeping the door open for further easing if European turmoil continued thereby increasing downside risks to to the US. Feel good factor is that the economy is expected to expand close to 3% in it's current quarter; this compares with 2% growth in 3rd quarter and sub 1% growth in the first two quarters of this calendar year. Jobless rate is down, consumer spending looks up and factory activity is higher in the US. On the flip side, November retail sales had its lowest growth in the last five months, unemployment is still at a level that poses concern and housing market is still sluggish; explains why Federal Reserve is in no hurry to tighten rates yet. . Dollar index moved past 80 reflecting greenback's safe haven status. US treasury yield is still on the rise with 10 yr currently at 2%.
European Summit that ended last weekend agreed on an intergovernmental treaty but nitty gritties are expected to be worked on over the next three months. It is clear that while such summits may try to foster future financial discipline and better fiscal integration, it has no magic solution to save Euro from it's current mess. Markets remained skeptical as there is no concrete steps to alleviate European government's debt crisis. Proposal to increase EFSF has not been favored by Germany's Merkel and market is jittery ahead of Bond auction today and tomorrow. Euro is trading close to year's low and expected to continue its trade with a negative bias.
Rupee - how low?
Rupee is dragged by global factors but the pace is being determined by local issues. Slower growth, disappointing IIP, balance of trade and current account deficit are crippling the economy and currency, but policy paralysis tops of the chart. RBI supplied dollars to cool demand but exporters remained on sideline as most analyst expect the rupee to weaken further. Given this, the supply side has been limited and it is obvious that RBI's intervention is only likely to be a token with its limited firepower. With EU crisis worsening by the day, capital inflows into emerging markets is suffering a serious setback. RBI is likely to hold rates in its policy meet on Friday and let's hope for strong policy measure from RBI to curb further fall in Rupee. While hoping for respite, act based on reality.
(sent out by mail on Wednesday, Dec 14)