On Friday evening India time, the much awaited U.S. Non-Farm Payroll (NFP) numbers were released in the U.S.
We will look at that data, take a stock of how it influenced other asset classes in the
U.S. and then figure it out how it could
impact our markets on Monday.
First the data
The Bureau of Labor Statistics reported that June NFP rose by 195,000. This number is better than
expected. The economists had pencilled in a smaller number of 1,65,000, which
was even lower than the May figure of 1,75,000.
Not only the June number was higher than expectations, it
also revised the May number of 1,75,000
to 1,95,000.
The second piece of economic data that comes along with the
NFP is the Unemployment rate. This came in unchanged at 7.6%.
The normal question that comes to the mind is that if more
jobs have been created, why hasn’t the unemployment rate come down?
Let me answer that for you.
The NFP data and the Unemployment rate are released by
different government agencies. The NFP is issued by the Bureau of Labor
Statistics and the Unemployment Rate is taken from the household survey. So they
are capable of painting a different picture.
How the American
markets reacted
The Dollar gained 0.74% against a basket of 6 currencies. The
British pound and the Euro, which had weakened on Thursday on a dovish view of
the Bank of England and the European Central Bank sank again against the
dollar.
The 10-year Treasury fell in response and the yield promptly
rose 22 basis points to 2.72%. This was the largest one-day move in yields this
year.The mortgage originators promptly raised the interest rate
on their loans by 0.25%.
Crude oil futures for the August contract rose $1.98, or
nearly 2%, to settle at $103.22 a barrel. This is the highest close for the commodity since May
2012, when it had closed at $105.22 per barrel.
This was largely on account of the state of emergency in the Suez and Sinai
provinces, through which Suez Canal and a pipeline that transports oil passes.
The Dow closed with gains of 147 points at 15,136, rising
0.98%. Both the S&P 500 and the Nasdaq also surged more than 1%.
How would our markets
respond
The first reaction would be to say that in line with the
international markets, our markets would also rise.
How the markets actually
pan out is a complex issue. We will come to that but before first let’s have a
look at how the other asset classes will behave.
The currency is going to be the first casualty of the Dollar
strength. The Rupee will depreciate further from Friday’s close of 60.23. It is
likely to make a new life time low as
the earlier intra-day low of 60.75 gets challenged in the opening trade itself.
The yields on the 10 year paper are likely to rise further. In fact, yields
were already on the rise on Friday. The yield had increased to 7.5% on Friday
from 7.42% on Thursday.
The FIIs who have invested in the debt market will feel the ground
slipping below their feet as their investments lose value and currency heads
south. The rise in the US 10 year yields will further put pressure on the
yields here, which in turn would weaken the currency.
A weak currency is both a cause and also the effect of rise
in bond yields.
The weak currency is also likely to trigger reconsideration amongst
the FIIs invested in the equity segment whether to call it quits now or risk further
deterioration.
Though the Nymex crude has closed at $103.22, we are paying
more price in Rupee terms than what we paid when crude was at an all-time high
of $147 a barrel in 2008, courtesy a weak rupee.
In this scenario of high crude prices and a weakening Rupee,
it is difficult to visualise our markets
doing well. In case they do well, it might be a good idea to lighten
commitments.
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