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

    Philip Wee

    FX Strategist - G3 & Asia

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.