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Informist, Tuesday, Sep 3, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady today due to lack of fresh rate cues, dealers said. Offshore traders paid fixed rates through the day, unwinding prior positions in both the two- and five-year swap rates, dealers said.

The one-year swap rate ended at 6.51%, flat against Monday's close. The five-year swap rate ended at 6.13%, against 6.12% the previous trading day.

The US Purchasing Managers' Index readings, from both ISM and S&P Global, were due after market hours. The US will also publish its non-farm payrolls data on Friday, which could provide cues on the US rate-cut view. During market hours, the CME FedWatch tool shows that 69% of Fed fund futures are factoring in a 25-basis-point rate cut, while the remainder are predicting a 50-bps cut on Sep 18.

"Everyone is playing on US rate cuts and now, what happens at the FOMC," a dealer at a foreign bank said. "There is a fair bit of offshore paying (fixed rates) as non-farm payroll data is expected to be on the higher side this month.

US Treasury yields also failed to lend significant cues to the market as they were little changed from the previous close. A drift lower towards the end of Indian market hours today lowered the paying pressure on swaps, dealers said. US markets were shut on Monday on account of Labor Day.

Fears of a recession in the US, which could lead to the US FOMC sharply cutting interest rates to support growth, have ebbed over the course of the past month. Latest personal consumption expenditure data, released Friday, showed a resilient consumer. Focus has shifted from inflation data to jobs numbers and growth ever since Fed Chair Jerome Powell stressed the US central bank would not want any further weakening in the labour market after July's unemployment rate touched a near-three year high.

On the domestic front, the Monetary Policy Committee is likely to cut the policy repo rate from 6.50% starting in December or February, dealers said. Domestic traders have not been able to bet big on rate cuts in India as Reserve Bank of India Governor Shaktikanta Das and other central bank officials have consistently pushed back against rate cuts until headline inflation is durably in line with the RBI's 4% aim. Projections do not show inflation reaching this aim even by Apr-Jun of 2025.

Policy uncertainty is likely to continue in India this month as the market awaits the announcement of three new external members to the Monetary Policy Committee with current external members' terms ending before the next monetary policy review in October. However, a more aggressive US rate view could attract some foreign fund flows to short-tenure swap as well, dealers said.

"You are seeing short-term swap rates get volume, but no direction," a dealer at a private bank said. "We have been moving in this 4-5 bps band for a week now, maybe longer."

OUTLOOK

OIS rates are seen opening lower on Wednesday as PMI data released after market hours suggested the world's largest economy was weakening quicker than anticipated, dealers said. This raised hopes that the US FOMC would cut rates aggressively. 

US S&P Manufacturing PMI was at 47.9 in August, against a flash print of 48.0 and a final reading of 49.6 in July. The Institute of Supply Management's report on business manufacturing PMI printed at 47.2, against 47.9 expected in a Dow Jones poll. A reading above 50 denotes expansion in activity, while a print below 50 indicates contraction.

US non-farm payrolls data for August, due after market hours Friday, is now awaited.

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 6.43-6.58% and in the five-year segment at 6.00-6.18%.

End

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

Edited by Aditya Sakorkar

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