US economy shrank by 1.5% in Q1 but consumers kept spending: Govt report

Key Highlights

Kuroda says US rate hikes won’t necessarily mean a weaker yen.
China’s economic slump shows no sign of bottoming out in May.
German economy dodges recession as war, pandemic weigh.
Powell: ‘Soft’ economic landing may be out of US Fed’s control.
Rishi Sunak £10bn support package to cut energy bills by up to £400.

USD/INR Weekly performance & Outlook

The USD/INR pair ended slightly lower supported by inflows into domestic assets and an easing of the dollar index in overseas markets. However, oil bids kept the Indian rupee under pressure. Adding to this, the easing of the dollar index further supported the demand for the domestic currency. Minutes from the Federal Reserve's May meeting contained few surprises, with most participants favoring additional 50 basis point rate hikes at the June and July meetings. As the Fed raises interest rates and shrinks its balance sheet, the U.S. dollar is expected to rally against most emerging market currencies, including the rupee. The RBI maintains a hefty stockpile of foreign exchange reserves and is expected to use these asset buffers to limit rupee volatility. Recently, RBI intervention in the forex market contained currency volatility, and going forward, we expect intervention efforts to continue to keep rupee depreciation orderly. The government has taken a raft of measures on the fiscal side to rein in inflation. Besides the fuel tax cuts, It has imposed export duties and export restrictions on wheat, sugar, and certain steel products and has slashed import duties on edible oil and certain raw materials used to manufacture steel. These measures from the fiscal side mean that the monetary policy would have to do the lesser heavy lifting. This was reflected in Rates markets as OIS cooled off. Another notable development this week has been the drop in USD/INR volatility. 3m Implied vols dropped 67bps to 5.71% this week after governor Das' comforting statement that the RBI would not allow runaway depreciation of the Rupee.
Fed minutes point to more rate hikes that go further than the market anticipates.

EUR/USD:

The EURUSD pair traded northward to touch the monthly high of 1.0766 during the week. The pair closed the last session of the week at 1.0727 levels. The major currency pair cheered broad US dollar weakness, as well as the market’s optimism, to portray the run-up. Favoring the pair were fears of an economic slowdown amid the recent raft of downbeat data from the US, which weakened the dollar. The bloc’s policymakers also teased rate hikes of late and cut the monetary policy divergence between the Federal Reserve and the European Central Bank, which bolstered the EURUSD prices. The EURUSD pair is expected to trade with a neutral to bullish bias on the back of overall positive sentiment in the market amid a weaker dollar and the expectation that the slowdown in the global economic recovery would force the major central banks to remain easy towards an aggressive rate hike. The market will watch out for the Eurozone’s Retail Sales, PPI, Unemployment Rate, and CPI datasets expected to be released later in the week.

ECB likely to get out of negative rates by end-September, Lagarde says.

GBPUSD:

The British pound has shown strong buying momentum during the week and closed the week at 1.2616. UK’s Chancellor Rishi Sunak announced multiple measures to tame the cost of living on Thursday. The UK government’s temporary levy on energy profits and targeted support to the most vulnerable households in the UK are some of the measures that favored the cable. The new measures aimed at easing the cost of living crisis that will give households hundreds of pounds off their energy bills ahead of another jump in the price cap to £2,800 in October. Further, market sentiment remained positive, as market participants feel relieved in predicting the Fed’s next move with more accuracy. The GBPUSD pair is expected to trade with a neutral to bullish bias amid positive sentiments around the pound on the back of the taken fiscal measure by the Govt. which is expected to help the UK economy to offset some impact of the surging inflation.

BoE's Bailey: In order to bring down inflation, BoE is prepared to raise interest rates again.

Dollar Index:

The US dollar index is moving gradually lower to re-test its monthly lows at 101.65 as the risk appetite of the market participants has improved firmly and safe-haven assets are losing their appeal. The sheet volatility increment in the dollar index is compelling for more downside, which could drag the asset lower. A responsive selling action in the dollar index is backed by more weakness in the Gross Domestic Product numbers and Personal Consumption Expenditure figures. The annualized GDP has been recorded at 1.5%, lower than the expectations and the prior print of -1.3% and -1.4% respectively. Lower GDP numbers have raised concerns about the economy’s growth prospects. Apart from that, the PCE remained stable at 7%, which is indicating that the inflationary pressures are finding an anchor now. This signals that a peak in price pressure is not so far, which has dampened the demand for the dollar index. The dollar index is expected to trade with a sideways bias.

Domestic and Global Equities:

Domestic Equities:

Domestic equity markets extended their gains for the second straight week as market participants took comfort from Federal Reserve minutes showing a pause to its rate hikes is on the cards later this year. The forthcoming week marks the start of a fresh month and is expected to be a data-heavy week. In stock-specific activity, auto and cement companies would grab some attention, as these companies will declare their monthly sales figures in the upcoming week.

Global Equities:

Stocks continued to rebound from a steep rout that drove the market down for seven straight weeks, with rebalancing from institutional investors potentially lifting equities at the end of the month. World shares rose after data showed that U.S. consumer spending rose in April and the uptick in inflation slowed, two signs the world's largest economy could be on track to grow this quarter. The S&P 500 wiped out its May losses and posted its biggest weekly gain since November 2020.

Domestic and Global Bonds:

Domestic Bonds:

India's benchmark 10-year bond yield edged lower during the week after a source said that the government will not need to borrow additional funds from the market in the current fiscal year. This news helped bond yields to have a breather from their weekly high of 7.42%, however relief rally was short-lived. Later in the week, the domestic bond market came under pressure due to elevated crude oil prices. India's 10-Year bond yield closed the week at 7.35%.

Global Bonds:

U.S. Treasury yields slipped as fears over the Federal Reserve’s plans to aggressively hike interest rates appeared to ease and a key inflation reading showed a slowing rise in prices. The yield on the benchmark 10-year Treasury note closed at 2.743%. On Friday, the Fed’s preferred inflation metric showed a 4.9% year-over-year rise in April. This result matched expectations and could be a sign that inflation is starting to decline. Treasury yields have mostly moved lower this week, as investors sought shelter from heavy selling in stock markets.

Monthly FPI Net Investments:

Foreign Institutional Investors continued to remain net sellers in the Indian stock markets as outflows continued in April and are now heading towards the eighth month in May. In the cross-hairs have been sectors such as Information Technology, Real Estate, and Financials, among others. The magnitude of the outflows has been cushioned by Domestic Institutional Investors, however, the inflows seem to be slowing down now. Active funds continued to drive outflows while passive funds turned marginally positive after the highest outflows witnessed last month.

Macro-economic calendar

Weekly Outlook: USD/INR pair ended slightly lower supported by inflows into domestic assets