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Dear Reader,

Markets went ballistic at the much-lower-than-expected inflation print in the US, taking it as the long-awaited and much-hoped-for sign that inflation is finally beginning to soften. With market guru David Rosenberg pointing out that it was the biggest downside miss in core retail inflation since April 2020, there’s much to celebrate. US bond yields dropped, stocks soared, and the dollar got crushed. Expectations of Fed monetary tightening eased, with Fed Fund futures signalling a lower terminal rate shy of 5 percent and rate cuts beginning by November next year. Central banks across the world will heave a sigh of relief, as the strong dollar has been wreaking havoc.

Will it last? There have been false dawns before, but this time the trend in the dollar seems to have been broken. Indeed, the dollar index has been weakening in the past few days and even the yen had bounced off its lows. The Indian Rupee too is well off its panicky lows, with the return of foreign portfolio flows.

Of course, a 7.7 percent headline print is still very high. The real action has been in core inflation, which has cooled much more than expected. There was an inkling of what was to come in the Chinese producer price index, which fell by 1.3 percent in October. Inflation appears to be finally on the way down.

As far as the Fed is concerned, it had already signalled that the pace of rate hikes would be slower. The data underline that stance. But while Jerome Powell in his press conference had indicated that the terminal rate would be higher and would remain elevated for longer, the lower inflation print has led the markets to believe that the final Fed funds rate will be lower and will remain at that peak for a shorter period. Indeed, traders now see the peak ECB rate too to be lower.

The market’s psychology has been clearly explained by Paul Singer, the billionaire founder of Elliott Management, the $56 billion hedge fund. He wrote in his newsletter: “It is amazing that the clearly growth-suppressive nature of current monetary policy (except in China) can coexist with the repeated bouts of markets signalling (by rallying hard) that the “pivot” to renewed easy money is right around the corner, and thus that the correct posture of investors is to be ready to jump right back into risk because of FOMO (fear of missing out). Markets, based on how they are trading now, are desperate to call the bottom and resume business as usual.”

Singer has been a bear for years, but that doesn’t alter the fact that what he says is an accurate description of market psychology today. He drove home the point by adding, “One of the most dominant strains of investor thinking currently about stocks, bonds and real estate is the confidence that market adversity is always temporary, that there is no permanent impairment of asset values on the landscape in a timeframe that matters, and that drawdowns can basically be ignored.” That has been the market’s attitude all through the current inflationary crisis. The difference is we now have some justification for it.

The good news is that if inflation is on its way down, the Fed will not need to induce a recession to bring down prices. A soft landing could then be on the cards. Indeed, the Atlanta Fed’s nowcast of GDP growth says, “The GDP Nowcast estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 4 percent on November 9, up from 3.6 percent on November 3.” That would justify current valuations in the US equity markets—the Fed’s recent Financial Stability Report said, “Prices relative to earnings forecasts fell from previously elevated levels to be modestly above median levels, suggesting that valuations were moderate. Meanwhile, the difference between the forward earnings to-price ratio and the expected real yield on 10-year Treasury securities—a rough measure of the extra compensation that investors require for holding stocks relative to risk-free bonds, known as the equity premium— declined a bit to its historical median.” The report also said its survey had identified the biggest potential risk to markets as “persistent inflation; monetary tightening” -- small wonder then that the markets threw a huge party to celebrate the ebbing of that risk. Even cryptocurrencies rallied, despite the meltdown at FTX.

Of course, there’s no wishing away the myriad risks that remain unresolved and Quantitative Tightening will ensure the slow and steady withdrawal of liquidity -- the Fed’s assets have fallen by a mere 3.2 percent since April, a minuscule fraction of the 105 percent rise since March 2020. The fall in the USD will boost commodity prices, which could also get a leg-up when China gives up its suicidal zero-COVID policy. WSJ reporter and Fed whisperer Nick Timiraos has tweeted that Goldman Sachs’ financial conditions index eased by 50 basis points because of Thursday’s monster rally. The Fed may not take kindly to all its hard work of tightening financial conditions being undone so blithely.

Nevertheless, the sharp fall in core inflation in the US tells us, in the words of Andrew Lloyd Webber’s catchy tune, ‘The inside might be as black as the night, but there’s a light at the end of the tunnel’.

Cheers,

Manas Chakravarty

Here are some of the stories we did and the insights we offered this week:

Stocks 

SBI, IndiGo, GAIL, Hero MotoCorp, Titan, Marico, Cipla, Coromandel International, Bharat Electronics, TVS Motor, Blue Star, Jubilant FoodWorks, Divi’s Labs, Cummins India, Coal India, Tata Motors, Weekly tactical pick, Eicher Motors, Galaxy Surfactants, PI Industries, West Coast Paper

Economy 

When will rural FMCG demand recover?

Economic Recovery Tracker

Financial Times

The illusory appeal of bear market rallies

Mining isn’t living up to its own hype

Tech jobs: mass layoffs herald Great Redistribution of talent

Big Tech job cull may be the start of things to come

Markets

Interview with Vasanth Kamath, CEO, Smallcase

The US dollar may cheer emerging markets

It’s time for investors to rejig portfolios as macros re-align

Blind spots that threaten financial stability

Is it time to write an obituary for crypto?

IPO

Five-Star Business Finance

Archean Chemical

Kaynes Tech

Policy 

RBI-EU standoff will hit markets

How to address Delhi’s air pollution

Policy focus will soon shift from inflation to growth

SEBI acts against misleading media

COP27: As coal is buried, alternative livelihoods must be found for millions

Industry and companies 

The outlook for commercial vehicles

Growth drivers falling in place for big pharma

Novelis’s lowered guidance a dampener for Hindalco

Is MRF losing its pole position in the tyre sector?

Divi’s and Gland Pharma’s weak results show B2B model not without risks

Aviation sector is facing supply chain turbulence

Banking & Finance 

A new era of open banking

Geopolitics 

What the US mid-term elections mean for India

Political chaos in Pakistan may increase risks for India

The political economy of friend-shoring

Politics 

BJP has an edge in Gujarat

Others 

Start-up Street: How the new funding cycle is different

Moonlighting and layoffs both symptoms of broken employer-employee relationship

Why EV makers should listen to their customers

Personal Finance: Overseas investments do not always hedge against a weak rupee