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Informist, Friday, Sep 6, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady as caution set in before US non-farm payrolls data scheduled after market hours, dealers said. However, trade volumes in the five-year swap rate hit the highest in nearly a month as traders placed bets on the data.

The one-year swap rate ended at 6.47%, against 6.46% on Wednesday. The five-year swap rate ended at 6.05%, against 6.06% the previous trading day.

"You can see the momentum is still on the receiving side," a dealer at a foreign bank said. "But we have already fallen quite a bit this week, and then NFP (non-farm payrolls) is due." The five-year swap hit a 15-month low during the day, and has fallen by 7 basis points since Monday.

During the same time, the yield on the 10-year US Treasury yield has fallen over 20 basis points, and was at 3.70% at the end of Indian market hours today. A string of weaker labour market data this week raised expectations that the Federal Open Market Committee would cut interest rates by 50 basis points at its upcoming policy review on Sep 17-18, dealers said. Currently, the CME Fedwatch tool said Fed funds futures show 47% chances of a 50-bps rate cut, up from around 30% earlier this week, with the remainder preparing for a 25-bps rate cut.

US data showed the number of private jobs rose by 99,000 in August, below expectation of 145,000 private jobs in a Reuters poll. While weekly unemployment claims fell slightly, US job openings in July fell to a three-and-a-half year low, according to data released Wednesday. US Federal Reserve Chair Jerome Powell had signalled discomfort with further labour market weakness and suggested it was time to ease restrictive monetary policy.

The data was capped off by the US non-farm payrolls data for August, released at 1800 IST. Non-farm payrolls rose 142,000 in August, against 161,000 expected in a Dow Jones poll. The unemployment rate subsided to 4.2%, in line with expectations, and below July's 4.3% reading, which was the highest in nearly three years. Average hourly earnings rose 0.4% in August, double the expected pace.

"I am still not convinced that the data this week would require a 50-bps rate cut (in the US), which could still be seen as a sign of panic and not consistent with the 1-rate-cut consensus the FOMC projected in June," a dealer at another foreign bank said. "While the market is hoping that happens, the Fed typically doesn't like to shock."

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.

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may take cues from the movement in US Treasury yields and crude oil prices. 

The initial reaction to the non-farm payrolls data has still kept odds of a 50-bps rate cut in the US below 50%, according to the CME FedWatch tool at 2020 IST. Globally, investors will gauge comments from two members of the US Federal Open Market Committee later today for takeaways from the crucial jobs report. Following this, US policymakers will enter a blackout period before the Sep 17-18 monetary policy review.

The swap rate in the one-year segment is seen at 6.43-6.53% and in the five-year segment at 6.00-6.12%.

End

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

Edited by Akul Nishant Akhoury

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