Jobless claims, ECB & RBI minutes and the new economic lexicon

One important and timely measure which we track on a weekly basis is the US jobless claims number which comes out every Thursday. It has two components - one is the initial claims (how many new applications) and the other one is the continuing claims (how many continue to remain unemployed). The data released yesterday indicated that the initial claims rose back above 1 million (forecast 925k) for the week ending August 15 from 970k last week. On the other hand the continuing claims continued to decline. The data denotes that any job recovery efforts remain fragile.

However, the bad news on the job front was quickly countered by the good on the vaccine side. A prominent US drug maker announced that its vaccine trials are entering into the last phase where they will test it on a large number of volunteers. This phase where the vaccine is administered en masse is the most crucial phase as per the researchers as it tests for the efficacy and possible side effects on a large enough set which is representative of the wider population. The monitoring can run into months as the possible effects might take time to show. But the markets as per their nature discount the good news quickly. The Dow Jones rose 0.17%, the S&P 0.32% and the Nasdaq gained close to 1%. The Nasdaq, being a tech heavy index is riding high on the rise of some big tech names as they are perceived to come out as winners of this virus induced disruption. The dollar index retreated some ground and is trading at 92.65 currently, the 10 year US yields are at 0.66%.

The minutes of the ECB July meeting were also released yesterday. The important take away was the cautious tone where the ECB emphasised that there is no place for complacency even if the economic activity is gaining momentum. The point that any premature tightening can put the ongoing recovery at risk will not be lost on the analysts who expect the accommodation to continue for a long time to come. The Euro is trading at 1.1870 against the dollar down from 1.1950 seen three days back.

Domestically, we also had the release of the MPC minutes which made an absorbing read and is recommended reading for anyone interested in understanding some new economic concepts. Every member brings their own vocabularies and allegories to the discussion, making the text rich. We will highlight some of those. The future inflation trajectory is seen to follow a “whipsaw” pattern. The dictionary tells us that the whipsaw pattern is the one where two opposite forces act at once. In the context of the economy this can be seen as constant alternating between the inflation and deflation which would keep the central bank on their toes. One other word of note was “hysteresis” which comes from the world of physics and magnetic fields, describing a phenomenon where some temporary changes in the magnetic field lead to permanent changes in its properties.  In the context of the economy it relates to concerns that the temporary covid dislocations should not lead to some permanent changes. Elsewhere in the policy it was indicated that although there is headroom for monetary action available it is important to keep the “arsenal dry” and use it judiciously. This is a martial allegory indicating the kind of importance which the policy makers are ascribing to the current crisis. Readers would remember that the country’s Fx reserves are referred as the “War Chest” in another example of martial imagery.     

Ultimately, what is the crux in simple language? The crux remains that inflation is a major concern and until it comes back below the mandated levels, policy action on rate cuts could be off the table. Any long bond position has to seek solace in actions like OMO or OT, if and when they come.