Intelligentguess

Situation

On a monthly basis

• Prices rose by 0.67% (0.29% in Feb’07)
• Core inflation ( inflation excluding volatile items) grew by 0.72% (0.39% in Feb’07) 

On an annual basis

• Prices rose by  1.94% p.a ( 1.84% p.a in Feb’07)
• Core inflation ( inflation excluding volatile items) grew by 1.87% p.a (same as in Feb’07) 

Background

1. Producer prices have been on a decline since Jun’06  ( 2.92% currently)
2. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. They have achieved this primary goal ( Note : inspite of inflation being at below 2% p.a since Sept’06 the ECB did raise interest rates by 0.25% in Mar’09)
3. Crude prices which were averaging 59.38$  in Feb’07 had risen to a 60.73 $ average in Mar’07 ( 2.26% rise)
4. As on April 16 ‘07 crude is averaging at 63.58$. ( 4.7% more than Mar’07) 

Conclusion

• The decline in producer prices may keep the inflation ( CPI) between  1.5% p.a - 2.00% p.a in the coming months.
• As such rise in interest rates would not normally be expected

HOWEVER :

1. European Central Bank council member Guy Quaden said the bank is “likely” to raise interest rates again to counter inflation in the 13 nations sharing the euro.
2. ECB President Jean-Claude Trichet last week endorsed investors’ expectations that the bank will raise borrowing costs again in Jun’07

Related links

• Europe - Euro area Bank Rate as fixed by the European Commerical Bank ( ECB ) since 2000
• Euro area - ECB raises interest rates by 0.25 basis points to 3.75 percent per annum
• Euro area - Producer Prices ( PPI) : Prices rise at the lowest pace since Aug’04 ( on an annual basis)

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Situation

On a monthly basis

• PPI rose by 0.6% ( 0.4%,revised, in Feb’07)
• Core PPI rose 0.5% ( same level as in Feb’07)

On an annual basis

• PPI rose by 2.68% p.a ( 2.31% p.a ,revised, in Feb’07)
• Core PPI rose by 2.92% p.a ( 2.74% p.a,revised, in Feb’07)

Background

1. Bank of England ( BOE) has an inflation target ( CPI ) of 2% p.a.
2. Current CPI in Feb’07 is at 2.78% p.a ( been dropping since Dec’06 from 2.97% p.a)
3. The Bank of Englands current policy rate is at 5.25% p.a
4. PPI was dropping from Jun’06 ( 3.39% p.a) and was its lowest in Oct’06 (1.58 % p.a)
5. Crude prices which were averaging 59.38$  in Feb’07 had risen to a 60.73 $ average in Mar’07 ( 2.26% rise)
6. As on April 16 ‘07 crude is averaging at 63.58$. ( 4.7% more than Mar’07) 

Conclusion ( see image for a larger visual)

• Crude prices has not dropped as yet and instead the average has risen in Apr’07.
• PPI looks likely to retain a range of 2.90% ( on upside) and 2% until mid’07. ( previously the range was expected to be 2.5% on upside, since the 2.26% rise in crude was not taken into account )  
• CPI prices may continue to retain a 2.70% p.a - 3.00% p.a on the fall of PPI from Jun’06 to Dec’06 ( lead effect) - and the effect of crude prices rise
• As such the BOE may continue to defer any interest rate considerations ( unless CPI has a sharp rise)

Related links

• UK - Bank Rate since 1970
• UK - CPI, Inflation marginally up in February’07 (on an annual basis)
• UK - Producer Price Index remains at 2.2 percent per annum in February 2007

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The Securities and Exchange Board of India (SEBI) has recently allowed the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) to set up an order driven online trading platform for corporate bonds.

This is a vital step in revitalizing the moribund corporate bond market in India. Surprisingly it seems to have received little publicity amongst mainstream media as well as market participants.

The full text of the circular is here.

Key points of the guidelines are

• In the initial stage of usage of the trade matching platforms, the system shall retain the essential features of the OTC market.

At last, the regulator at least explicitly recognizes that the market is an OTC one and likely to remain so for some time to come.

• At the option of the participants, they will also be allowed to undertake Over the Counter transactions. Such Over the Counter transactions shall continue to be reported on the reporting platforms.

The reporting platform is distinct from the trading platform. This gives freedom to participants to close deals outside the trading platform too.

• The entities trading in listed corporate debt securities may settle their trades bilaterally between them. They may also use the services of the stock exchanges for clearing and settlement.

Another acknowledgement of market reality.

• All entities including Qualified Institutional Investors (QIBs), shall trade in corporate bonds subject to a minimum value of INR.100,000. Exchanges may also have a limited segment for transactions in smaller market lots.

Reduction in tradable market lot is a welcome and good step.

• The Actual/Actual day count convention, presently followed for dated Government Securities, shall be mandatory for all new issues of corporate bonds. For existing bonds, the existing terms may be observed unless agreed to by issuers and holders.

This would bring about uniformity, and remove the present “laissez faire” status when it comes to day counts. However SEBI seems to have got its fact on Government Securities wrong. They are traded on a 30/360 basis and not on an Actual/Actual basis. Some clarification on this is in order.

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