US concerns are trade and housing
Two concerns pose downside risk to the optimistic outlook of the US Federal Reserve Bank. First is trade tension. America imposed tariffs on $16 billion of Chinese imports and China quickly retaliated. Yet a breakthrough in NAFTA negotiation between Mexico and the US seems likely. Second, US consumers are experiencing lower affordability of key assets like housing and cars. Both are highly sensitive to changes in interest rates.
Markets expect 0.2% monthly for July’s core PCE inflation report, pushing the annual rate to 2.0% from 1.9% previously. Personal income and spending for July should remain steady indicating that economic momentum is slowing. US yield curves remains flat (US 10-year at 2.80%). USD is range bound, but EUR/USD will need a clear driver to break through 1.1650. Good news or a hawkish European Central Bank would be catalysts; an Italian veto of the EU immigration budget would push the other way.
The Fed’s annual economic symposium in Jackson Hole, Wyoming, is fading in relevance. Despite hype of Fed Chairman Jerome Powell providing an off the reservation speech and rebuttal of Trump interventionism polices, he stayed on script. He defended the gradual path for tighter money: 0.25% hikes in September and December.
Indian rupee eases
At record highs, USD/INR is trading sideways since its rise above 70 in mid-August, easing back to 69.91 last Friday as US Federal Reserve Chairman Jerome Powell confirmed a “slow and gradual” pace of rate hikes, thus softening the USD. Additionally, trade talks between China and the US contributed to a risk-on sentiment.
To publish on Friday, Indian Q2 GDP is expected to remain solid and above the 7% range (prior: 7.70%) off a weak base from last year. The Reserve Bank of India (RBI) will most certainly maintain its hiking path, raising interest rates to 6.75% by the end of the year after two rises of 0.25% in 2018. As industry remains solid due to strong domestic demand, inflation continues to accelerate, which points to further tightening by the end of the year. We expect the rupee to benefit. Key risks for INR remain its sensitivity to increasing energy prices as well as global risk-off sentiment. USD/INR is expected to trade sideways along 70 in the short-term.
