Week of MPC, NFP and Presidential debate

The new week has started but the themes remain the same like the new wave of corona cases, discussion on a second US stimulus, Brexit negotiations and US elections. The US elections race is getting into sprint mode as the two candidates, the incumbent and the challenger will face each other on the debate platform on Tuesday. The contours of the debate will mostly be about the war cry of MAGA which will be countered by the plea to save the country from chaos. The latest news on tax returns is also expected to make an entry as well as the discussion around the propriety about nominating a candidate to the US Supreme court just a month before the elections.

NFP data will be released on Friday where the market will check the payroll numbers as well as the unemployment numbers and wage growth. As we have written previously that wage growth is an early indicator of inflation. One would be correct in assuming that as the slack in the employment market goes down the wages should spike up. But at what level of unemployment this should happen is difficult to estimate.

On the pandemic stimulus side, the market will be keen to see if the 2^nd October deadline for the new package will be met. The House Speaker Nancy Pelosi on Sunday said that deal could be reached with the White House in the coming days.

In the round up of the various global market parameters, the dollar index is at 94.5, US 10 year yields at 0.66, GBP at 1.2780 and EUR at 1.1636.The final scheduled round of talks between the UK and EU on a post Brexit trade deal takes place in Brussels today which would impact both the euro and pound sterling. A comment by Italy’s central bank governor that the euro’s strength of late has been worrying because it generates further downward pressures on prices and impacts the inflation negatively would be hanging on the euro’s neck in trading today.

Domestically the big news of Friday was the devolvement of close to 17850 Cr INR on the primary dealers at the cut off yield of 6.0095%. This devolvement coming a day after the OMO bids rejection of 10000 Cr INR represents a growing disconnect between the expectations of the RBI and the markets. The PDs which are getting saddled with government stock on most of the weekly auctions will start demanding higher underwriting commission for the service. The impact is already visible in the commissions. The important event for the markets would be the rate decision due on October 1. The current 10 year benchmark yield is 6.0450, three bps up from the Friday cutoff.