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Opening summary on y’day’s data release – US inflation is finally subsiding and even the labor market is showing signs of cooling off. The aggressive rate hikes have given headroom to Fed to go soft and now we need to see how the hard landing is avoided. While overnight market indices viz. wall street, bonds, currency and gold have wobbled and but managed to close with reasonable gap. I’ve a feeling things will fall in place soon and markets recover, especially Gold and Bonds. Equity I may still be wary of, till we get clarity on recession and the soft landing
On India – the lower inflation and better than expected IIP numbers are also a boon for the market. The ground is set for fall in bond yields and one can surely look to go long on duration. On equities the returns may normalize to near 10 – 12%, stock specific, in next few years though index may face challenges to burst out in entirety, but India will continue to outperform and anyways I continue to remain bullish on Gold and extremely bearish on Bitcoins
- Form is temporary class is permanent and the class is back. I mean the era of 2020, the levels at which the market was at that time and with that a far more grounded but a bit less aggressive and more bullish on markets – it’s me the realist
- Was reading migmornings of 2020/21 and I find markets are heading to those levels only. Chances are that Dollar index may again shed a figure getting into double figure and my favorite Gold once again is heading towards magical USD 2k mark as it crosses USD 1900 overnight. Targets of 2020 barring equity seem to be in range; equities can attain those levels only if there is a recession and same may not be good for the markets
- I will start international – The US CPI for December has dropped to 6.5% from 7.1% the previous month and while the number is still high, it’s in line with expectation clearly reflecting the positive outcome of steroid like doze inflicted by Fed in form of 4 successive rate hikes of 75 bps flanked with 50 bps either side after opening with 25 bps. (core CPI – 5.7%)
- Though the inflation is not dropping at the desired pace, gradual moderation is reasonable enough to give Fed a chance to relook at reducing the pace of hike significantly, I mean even 25 bps and odds are building up towards that
- A complete pause however is a far off expectation for now, given that the job is half done and can’t be left in the middle. Bond yields reacted with 10y dropping towards 3.45% and the 2y was at 4.15%
- White house was quick to jump the queue and announce an appreciation for FOMC stating that Fed has managed to ensure soft landing for the economy and thus avoiding recession. I feel it’s a bit too early and can term it “Politicians at play”
- While the 2*10 spread is still close to 70 bps, it’s shrinking off late and in case Fed manages to avoid the US economy slipping into recession it will be a perfect pullback of inflation and Powell’s legacy on managing it, for future generations who for now swear by name of Volcker, Greenspan and to some extent Bernanke
- At the announcement of numbers there was buoyancy in markets but with time it fizzled out as most indices took an adverse turn before markets could connect the dots
- Dow after wobbling ended 215 pts higher, Nasdaq gained 70 pts and S&P ended up by 15 pts. Dollar index was down to 102.00 and in commodities Crude scaled up to USD 84 while Gold ended the day above USD 1900, maybe first time since the Baltic war
- Bitcoins registered an over 5% gain to close at USD 18,800. Divided opinion in market that it’s on the comeback trail but I feel it’s a dead cat jump. Incidentally this is another instrument that’s at 2020 levels but will not see the dream run of 2021
- Coming to India – the headline CPI numbers for December stood at 5.72% vs. 5.90% in November while the core CPI stood at 6.1%. The Q3 number at 6.1% is well below RBI forecast of 6.6% and augurs well for the market
- Even stronger growth was registered in IIP for December at 7.1% vs. -4.1% previous month and forecast of 2.7% thus completing the cycle. Strong growth and benign inflation is a perfect recipe for market growth. (my caveat though – my confidence in inflation numbers released in India is a bit less as I rely on, on ground data, क्या है जो सस्ता है)
- Now how this converts into numbers – bond yields were a bit flattish y’day as 10y stayed flat at 7.29% and volumes in market were lower than previous day though it still remained above INR 320.00 bn
- Expectations have started building up on the complete pause on rate hike in India and odds have started gaining weight to that effect. It’s not unlikely that RBI will not pause, infact with buoyancy in tax collection, benign inflation and the respite it’s getting on exchange rate, the odds have become stronger, but the hike is still not completely off table. Best case scenario it has given the option to go for a longer pause
- Irrespecitve of whether the hike is announced or it’s a longer pause, govies’ yield seem to have peaked out and at the most around budget if there is a surprise in borrowing numbers or any other twist one may see a 7.50%
- Otherwise as I said a few days back, time to give stop loss a bye and today I add – if one has the heart of a trader look to build duration, go as long as possible and hold – with a flat curve oscillating now मज़ा आएगा
- Nifty ended lower by 40 pts to close at 17,860 and the only silver lining about the day’s trade was that it recovered from an intra day low of 160 pts with a 4:5 a/d ratio. The SGX nifty is indicating a gap up opening by 65 pts and this can augur well for markets
- Came across an interesting point today – given the Chinese recovery there is a likely shift of foreign money from India to Hongkong and China as those markets were in doldrums for quite a while and can give better returns now. Point taken, however India has off late become self reliant with significantly deep pockets of DIIs and retail money getting in; some impact may be there however that doesn’t turn me bearish as the long term stable money may still find allocation here
- Closing remarks – off the cuff – the major data is behind us now both locally as well as internationally and the next major event is budget. Having said that overall trajectory is looking to be positive as things are falling in place. Keep yourself ready to take a plunge once things settle down. Don’t carry a short term view, carry a long term view as this is going to be India’s century
Stay safe, stay healthy, God bless you all, Have a great day !!
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Vikas Miglani writes 