ISLAMABAD: In a poll, 80% of the market voted for’ No Change’ in Monday’s MPS (Monetary Policy). This sentiment may change after yesterday’s SPI decelerated by a mere 0.33%, even after a substantial reduction in fuel prices. As a result, capital markets witnessed some correction, along with other factors of rollover week & declining reserves contributing towards a 240-point correction.
If inflation doesn’t slow down significantly over the next few weeks, pressure on interest rates will rise again. The government may need to increase vigilance on retailers & trade bodies to ensure that the reduction in fuel prices is transmitted to the end user.
Interest Rates May Have Peaked
We know that the GoP has communicated that it doesn’t want interest rates as it clearly impacts the borrowing costs and, consequently, the fiscal deficit. This is why the markets are opting to go long in bonds, with a view that interest rates have peaked.
IMF Review
The crucial IMF review will start from November 2. Historically speaking, the IMF winds up its review within 10 days. Most analysts believe the IMF’s focus will be on energy reforms, privatization, tighter monetary policy & economic reforms to circumvent the emerging geopolitical risks.
We believe the rupee will strengthen again once the IMF tranche is approved, but till then, it will anchored at the 280 level. With the current Middle East conflict, exporters are reluctant to sell in forward.
Some additional factors around the local currency are:
– Forex Reserves declined by approximately $260 mn
– Friday REER on the JP Morgan Index for the rupee is at 102
– IFC committed approx $1.5 bn in short & long-term investments
– Forward premiums declined further, indicating a liquidity squeeze
– Repatriation of profits and dividends reached a 17-month high at $164 mn
US Yields stay steady
After raising borrowing costs by 525 basis points since March 2022, the Fed is widely expected to keep interest rates unchanged at the conclusion of its two-day policy meeting on Wednesday, November 1.
Beyond the expected rate decision, all eyes will be on Fed Chair Powell, who will hold what will be a closely watched press conference shortly after the release of the FOMC statement as investors look for fresh clues on how he views inflation trends and the economy. Powell left the door open to an additional rate hike, noting that the US economy’s strength and tight labor markets could require tougher borrowing conditions to control inflation.
US Stock market Under pressure
Wall Street’s three major indexes are on track to end the month with heavy losses as surging bond yields and fresh uncertainty surrounding the future path of the Federal Reserve’s interest rates have renewed selling in stocks.
Dollar gains again
The US dollar was able to stage a comeback against most of its major counterparts as the flash US PMIs for October suggested that the world’s largest economy fared better than expected during the first month of the fourth quarter. This has taken the USD Index to multi-month highs of almost 107. The divergence between the US & Euro zone has weight on the Euro
Gold on a Roll
Gold finally breached the elusive $2,000 mark yesterday. The geopolitical concerns are not going away in the short term, which continues supporting gold as a safe haven.
