Weekly Report: Stellar US jobs report overshadows Central bank policies, Adani saga masks Union Budget onshore in an action packed week

Stellar US jobs report overshadows Central bank policies, Adani saga masks Union Budget onshore in an action packed week

I cant think of a week in recent times in which the market has had to navigate through as many important data points and events as it had to in the week gone by.  

On the global front we had:

1) Fed policy: Fed hiked rates along expected lines by 25bps to 4.50-4.75%. Fed policy statement said that ongoing rate increases were needed to bring inflation back down to target. While disinflationary process had begun, inflation still continues to remain very elevated and job market was still very tight. The tone of the statement and conference suggested that rates would remain higher for longer. Despite the seemingly hawkish tone, US yields had dropped and US Dollar had weakened post the policy. 

2) ECB policy: ECB hiked rates by 50bps to take the deposit rate to 2.5% and pre-committed itself to a 50bps hike in March. ECB said risks to inflation and growth were now more balanced. Market's interpretation seemed to be that the March hike would be the last major hike and that hikes beyond that would be limited. There was a massive rally in European  bonds. Yield on the German 10y bund dropped by the most in a day since 2011. Euro came off from highs above 1.10 which it had seen post the Fed policy. 

3) BoE policy: BoE hiked by 50bps, taking the bank rate to 4%. The 7-2 vote split and statement was less hawkish than expected. BoE saw a shorter and shallower recession than it did in November. Market interpreted the policy as BoE hiking by perhaps another 25bps once or may be twice and then ending the hike cycle. There was a massive rally in Gilts and the Pound weakened post the BoE policy. 

4) US Jobs report & ISM services data

US January jobs report was the highlight of the week. Headline NFP print at 517k far exceeded expectations of a 190k increase. Unemployment rate dropped to 3.4%, lowest in 54 years. Labor market continues to remain not just resilient but robust. With such strong labor data Fed cannot afford to be seen as softening its stance. January ISM services PMI too came in way above consensus expectations on the back of strong orders. December JOLTS data that had come out a day prior had pointed to an extremely tight labor market as well. There is a risk that despite energy prices cooling off , tight labor market and higher wages can keep core services inflation elevated. US treasuries gave up entire gains from earlier in the week and the Dollar strengthened across the board post the Jobs and ISM data. 

5) Earnings of major companies 

While Meta' earnings best expectations, Apple, Alphabet and Amazon earnings fell short. This coupled with a strong jobs report, dampened the sentiment somewhat on Friday. Nevertheless S&P500 ended 1.6% higher on the week. 

Domestic Front

1) The Union budget

Union budget ticked all the right boxes. Government managed to increase CAPEX (to 3.3% of GDP) while attaining fiscal consolidation (Fiscal deficit budgeted at 5.9% of GDP). The growth, tax buoyancy and other estimates underpinning the budget all seemed credible. The budget was positive from the point of view of both, equity as well as debt markets. The sentiment was however dented by the Adani episode. We believe, the underlying India story will remain intact unless Adani episode snowballs and has a cascading effect across the banking sector and supply chain.

The only bit of disappointment from the budget was for the insurance sector. The intent there too is positive i.e. to end the tax arbitrage

2) The Adani saga

The Hindenberg report driven turmoil rocked Adani group stocks. Adani enterprises decided not to accept the Rs 20000crs FPO proceeds in the interest of investors, with the stock price having fallen sharply, to well below the issue price. Credit Suisse and Citigroup stopped accepting Adani group bonds as collateral for loans. RBI asked banks to furnish exposure to Adani group entities. Adani group credit outlook was cut to negative by rating agency S&P. NSE put 3 Adani Stocks under ASM framework. 

The sentiment in the Domestic equity markets will be driven by developments around Adani group in the coming week. The risk is, with investors and lenders becoming risk averse, even the good businesses of the group and viable projects may not be able to attract capital. Rolling over short term credit would be difficult. The challenge for the group would therefore be to ring fence sound businesses and convince lenders and investors to continue extending credit to them. If that does not happen, it would be difficult to keep operations going and this would have far reaching systemic implications given its scale and how  integrated its businesses would be with the domestic supply chain. We will have to wait and see how this saga unfolds. 

Price action across assets

US yields ended 5-10bps higher across the curve, after a massive up move triggered by the solid NFP print. 

Dollar ended the week stronger against all G10 currencies and most Asian currencies after Friday's move. 

S&P500 and Nasdaq ended 3% and 5.4% higher respectively. Nifty ended with a gain of 1.2% helped by Friday's short covering move. 

Brent ended the week 7.8% lower at USD 80 per barrel. Gold dropped 3.3% to USD 1865 per ounce on Dolar strength. 

Data/Events to track in coming week

How the Russia-Ukraine war pans out given that it is intensifying again and we are close to the 1 year mark since Russia invaded Ukraine. 

RBI monetary policy on Wednesday

UK Q4 GDP on Friday. 

How the Adani saga unfolds onshore. 

Expected Ranges and Bias

USD/INR: 81.85-82.90 with up side bias.

EUR/USD: 1.0750-1.0950 with sideways price action

GBP/USD: 1.1980-1.2250 with sideways price action

USD/JPY: 130.50-132.50  with up side bias