US recession probability eases; INR vulnerable disappointing data


The US yield curve has dialled down the probability of a recession. INR is vulnerable.
Eugene Leow, Philip Wee12 Nov 2019
    Photo credit: AFP Photo


    Rates:  US recession probability dialed down  
                                       
    As pessimism over the global economy fades, the US Treasury curve has dialled down the probability of a US recession over the coming 12 months. The yield curve (3M/10Y segment) first turned inverted in early 2019. This was preceded by a crash in stocks and yields in late 2018 when the market judged that the Fed had overtightened relative to where the economy was. Even as the Fed delivered rate cuts, the market was initially not convinced the easing was sufficient. At its peak, the yield curve was inverted by 50bps, predicting a close to 40% chance of recession. This figure has since dropped closer to 20% as the curve normalises (34bps currently).
     
    The reduction of tail risks (hard Brexit and China-US trade war), tentative signs of bottoming out in the global electronics cycle and the pushback from major central banks against overly low rates have contributed to steeper curves. While there are some lingering risks, market pricing of Fed policy is about appropriate – less than a cut in 2020. However, that too can be removed once there are more concrete signs that the global economy is stabilizing.

    FX: INR vulnerable to disappointing data

    The Indian rupee depreciated to 71.47 from 71.29 on Monday. India’s industrial production contracted sharply by -4.3% YoY in September vs the -2.5% consensus. August’s contraction was revised down to -1.4% from -1.1%. The weakness was broad-based, cutting across capital goods, consumer durables, and infrastructure and construction. In particular, the sharp -20.7% decline in capital goods production did not bode well for investment, a sign that the economic slowdown become entrenched.
     
    Hence, GDP data for the July-September quarter scheduled for release on November 29 will be important. Headline growth has already slipped to a six-year low of 5% YoY in the quarter ending June. Last week, Moody’s cited India’s slowdown as a significant reason for its decision to downgrade the country’s sovereign debt rating outlook to negative from stable. A disappointing GDP report could lift USDINR above its two-month range between 70.5 and 71.5, and bring it closer to the year’s high around 72.5.

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

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