Stop obsessing over inflation; growth real concern: Udayan

The global picture looks slightly better on Friday morning, as the US jobs data and softer US bond yields rates help Wall Street end near session highs with over 1 percent gains.

“There is a possibility that the Fed will talk in dovish tones in the upcoming Fed meeting and some of the recent damage might get unwound. Markets could see a temporary rally,” says CNBC-TV18's managing editor Udayan Mukherjee. Acoording to him, we must stop obsessing about inflation numbers but focus on growth numbers. And unless the data points suggest that we are back above the 6 percent growth number, the stock market has a lot to worry about. Also read: Buy rate sensitives on every dip with 1-2 year view: Citrus Below is the verbatim transcript of his analysis on the channel On Nifty The market is at important support levels and we have been discussing the possibility of a pullback the last couple of days but it has been quite illusive. Yesterday, in the morning it looked like we might strike out but then after the FM’s conference, the market came right down. So the closing has been quite disappointing but the global picture is a little better. Yesterday, we saw some good jobless claims data from the US. There were two ways the markets could have read it. One of course is that the things are improving; the other is how the Fed will read it in this constant debate over a quantitative easing (QE) withdrawal. However, the fact that the US bond yields softened yesterday by about 5 basis points (bps), they told you that that market is probably breathing a little easier. We were talking about this possibility yesterday as well that whether going into the next Fed meeting, markets will start slowly adjusting to a view that the Fed will talk in dovish tones and therefore some of the recent damage might get unwound. It is a possibility. So, as we wade forward into the next couple of days, it is possible that the markets come around to thinking that at least in this meeting the Fed will not deliver terribly bad news and you could see some of the recent losses being pared. After that, it is a different ballgame altogether because markets there seem to be quite sanguine that sooner or later, this unwind will begin. Therefore, this might just be a temporary rally but even a temporary rally would be quite handy because it has been a one-sided move, markets are beginning to lose their nerves and talking about much deeper levels. So at least a 100-150 points kind of a Nifty pullback would sort calm nerves a little bit. On calm US markets versus ripples in emerging markets It stands to reason why that is happening because the emerging market rally has been fed squarely by global liquidity injection. The US economy is improving and you can see that in the data points every month, which are suggesting that the economy is on a mend. That is what they are playing in the equity market out there. It is true that liquidity helps on the margin, and liquidity is part of the reason why the economic growth is picking up out there. There the equity performance I think is far more related to what is going on in the improvement in the economy. However, the emerging market rally, probably in the face of fairly difficult macro, was almost entirely predicated on this global liquidity finding its way into many of these emerging market asset classes. So, the first hint of that liquidity drying up has hurt emerging market currencies, and emerging market equities much more than the US market. What happened over the last few months has some very good economic rationale unless you get stuck with the absolute level of growth, which we keep hearing from our politicians that we are great at 5 percent whereas the US is still at 2 percent, so what are we complaining about etc. But that is not the logic with which stock markets or any financial asset class performs. Therefore, once you strip yourself off this fixation with the absolute number, but look at what is going on with the marginal rate of change, it stands to reason that the US equity markets have performed better than the most of the emerging market asset classes - where growth and deficits are a much bigger problem. On inflation and growth  numbers The inflation number is expected to be benign but the last consumer price index (CPI) number was not great and that the Reserve Bank of India (RBI) will keep in mind, the wholesale price index (WPI) number will be well below 5 percent. So that probably gives little bit of hope to the bond market but those hopes have been dashed already by the way the rupee has moved and what the bond market has been pricing in. So, it will be a surprise now if the RBI does move on Monday with a 25 bps cut. However, what one should look very closely in the inflation number today is the core inflation number. Now contrary to what was happening a couple of months back - if the core inflation number starts to crumble more, the market should start to worry because it should be amply clear to the market right now that this obsession with interest rate cuts is not what is working. We have had a few of them but where has it left us in terms of the economy? Has it had any effect on growth so far? But this is not about incrementally 25 bps of an interest rate cut. Every data point is bearing that out over the last few months. So, once you take that blinker off then you try to focus on growth, which is the market’s main problem. The core inflation number along with a very weak index of industrial production (IIP) number that you saw a few days back will tell you that there is just no pick up in growth, which ties in with the HSBC downgrade that you heard overnight of scaling down their gross domestic product (GDP) forecast from 6 percent to 5.5 percent for this fiscal, and also 6.6 percent for the next fiscal. This means the house which probably called it the best and earliest, in terms of this FY13 being at 5 percent, they are now saying that we are looking at probably 6-7 quarters of very tepid and anemic economic growth in India. Therefore, we should stop obsessing about some of these things and stop getting kicks out of WPI inflation going down or up but we should focus on growth right now. Unless any of these data points concretely suggests to us that we are on our way back to more than 6 percent this year, the stock market has a lot to worry about. _PAGEBREAK_ On index levels The key question is that whether having lost almost 450-points, now the next move for the Nifty in the near term is a pullback or a continuation of the downtrend. Some of the technical evidence could be suggesting that we are in for a bit of a pullback. Yesterday’s price action was quite disappointing in that sense because in the morning you might have been fooled to believe that the pullback has started and then it was abruptly aborted in the middle of the day. One needs to be a bit cautions because you are working counter trend out here and also going against the grain of the fundamental news flow, which has been coming in. Having said that I think it is entirely conceivable that the Fed at least in this meeting assuages the nerves of investors and says no you guys are panicking about nothing because markets have put a lot of pressure on the Fed going into this meeting. If and when that happens it is possible that the markets snap back and that could coincide with the Nifty pullback as well.  Given the way the fundamental numbers have come in which is the way the rupee has crumbled, the way the macro growth numbers are coming in and probably going into the earning season in July, which is likely to be another weak one, it is difficult to see why the market will go up. Yet from this level of 5,700 the picture is unclear whether we go to 5,500 straight or 5,700 goes to 5,900 and then we start another leg down to 5,500. The sequence of events is a little difficult to predict. I think we are setting ourselves up for some volatility next week both ways. It wouldn’t be terribly surprising or is not beyond the realm of probability that we get a reasonably big pullback if global events pan out. Of course, there is always the possibility of a breakdown that these pull back attempts get sold into, they do not succeed and we go straight down to 5,500, which would not be very surprising fundamentally speaking. However, traders you need to be cautious at this juncture because it is heading into an important global event and there is a possibility that you will get stopped out if you are too aggressively short. So discipline and caution could be important even for the bearish trader now. On FII outflows: The magnitude of selling seems to have diminished yesterday from the Foreign Institutional Investors (FIIs) because the market has fallen quite a bit. I don't know whether it is a function of the level too which FIIs are getting a bit cautious about where they are probably tempering their selling in the equity market or did at least yesterday. There are two reasons for that. One of course is the global event that we have been talking about. FIIs don't want to be caught on the wrong foot with Ben Bernanke speaking in very dovish tones and then running a very large short book at that point. Also the finance minister actually disappointed with announcements yesterday, but actually put out a timeline saying before the end of June there would be announcements on FDI and there would be announcements on coal and gas which probably leaves a little bit of hope on the table for the next couple of weeks in terms of announcements, which could be rupee positive. When you look at both these things in combination -the FII trader might be saying we got the trade right, sure it has played out 400 points on the Nifty but from here one-two announcements can actually change the trade in the near term. Remember this is just a short-term kind of possibility we are talking about. In the medium term there are still lots of challenges and the market may well come to trade below the levels where we are today but in the short-term there might be volatility and therefore you need to be a bit prudent and not get carried away because the inclination is always after a 450-point down move to extrapolate that and to start talking about much lower levels. Those levels may eventually come but markets do not fall 800-900-point usually in one line so a little bit of tactical thinking may not be a bad idea.