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Informist, Thursday, Aug 22, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower today as offshore traders received fixed rates following the release of minutes of the Federal Open Market Committee's meeting after market hours on Wednesday, dealers said. 

The one-year swap rate ended at 6.50%, against 6.53% on Wednesday. This was the swap rate's lowest close since Sep 23, 2022. The five-year swap rate ended at 6.07%, a 14-month low, against 6.11% the previous trading day.

The FOMC minutes showed several members were ready to cut rates in September, even before July jobs data showed unemployment spiking to a near three-year high. The members even discussed rate cuts in July, which suggested to traders that their expectations of imminent rate cuts in the US were not misplaced, dealers said.

According to data from CME FedWatch tool, Fed funds futures have completely factored in at least a 25-basis-point rate cut at the FOMC's next meeting in September. Traders see a 26.5% chance that the committee will cut rates by 50 bps. 

"The FOMC minutes are very positive for any US traders who is punting on rates," a dealer at a foreign bank said. "We were expecting to be getting quite a strong flow today, and that was seen."

Federal Reserve Chair Jerome Powell's speech at the Jackson Hole conference on Friday is expected to further cement the view that the US may see rate cuts in the coming meeting. Powell may take into account revised labour market data released on Wednesday, wherein the US non-farm payroll growth was revised downward.

Government data showed US non-farm payroll growth being revised down by 818,000 jobs per year or 68,000 jobs per month for the period from April 2023 to March 2024. This revision was the steepest preliminary downward revision since the global financial crisis. This suggests that the expected softening in the labour market could be greater than assumed.

Most of the action was dictated by offshore flows into domestic rates, with India's Monetary Policy Committee likely to cut rates only in December or later, dealers said. Traders were also cautious of taking a near-term rate view on India ahead of minutes of the MPC's meeting held on Aug 6-8.

During the second half of the day, the volume of receiving fixed rates eased after Purchasing Managers' Index readings in Europe suggested that rate cuts by the Bank of England and European Central Bank might not be as aggressive as earlier thought, dealers said. The eurozone composite and services purchasing managers' indices were all over 50, showing expansion in economic activity. The UK PMI readings on manufacturing and services were higher than expected. 

"There was not much to go on domestically. Although the (offshore) flow was quite one-sided, I think the market is still quite confused and really uncertain on when the RBI will cut the repo rate," a dealer at a private bank said.

OUTLOOK

Swap rates may open steady on Friday as minutes of the MPC's Aug 6-8 meeting were in line with the market's expectations, dealers said. The six-member committee broadly stuck to its comments made in earlier minutes, with RBI members – who will attend the next policy meet in October – continuing to focus on curbing inflation to the central bank's 4% target.

The terms of all three external members of the committee will end before the next monetary policy review.

Separately, traders look forward to US Fed Chair Powell's speech at the Jackson Hole Economic Symposium, scheduled at 1900 IST on Friday.

Any sharp movement in US Treasury yields and crude oil prices may also lend cues at the opening. The swap rate in the one-year segment is seen at 6.43-6.63% and in the five-year segment at 6.00-6.25%.

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Avishek Dutta

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