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Moneycontrol Pro Weekender | Walking a fine line

Jerome Powell did the fine balancing act of laying out the ground for a taper, but kept markets happy by stopping short of saying when

August 28, 2021 / 10:04 AM IST
Jerome Powell

Jerome Powell

Dear Reader,

The US Federal Reserve Chair Jerome Powell’s much-awaited speech at the Jackson Hole symposium is done and dusted. Judging from the reaction of the US markets to his speech — the Dow closed up by 0.7 percent — they were expecting worse or were relieved by what they heard.

Earlier this week, Mohamed El-Erian wrote in the FT that Powell could “either fly under the radar screens of markets, or offer up some eye-grabbing policy announcement” and said he won’t be surprised if he chooses the former. He was right.

On employment, Powell said the gains are substantial and that he expects favourable conditions for job seekers to continue, allowing the economy to attain maximum employment. Even the Delta variant is seen only as a near-term risk to this scenario.

On inflation, he said there was no evidence of broad-based inflation. As supply problems got resolved, inflation in auto and durables has slowed and could decline. Even wages and longer term inflation expectations are not giving cause for concern. In such a situation, tightening before determining if higher inflation was sustainable could prove to be harmful was the message.

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But see what Powell’s view is on the path ahead for monetary policy. He says that the “substantial further progress” test has been met for inflation and there is “clear progress” towards maximum employment. That’s why he had agreed with a majority of the FOMC participants in the previous meeting that reducing the pace of asset purchases can be started this year.

Depending on your own bias, it would seem the speech can be interpreted as dovish or hawkish, as all that remains is to decide in which of the four remaining months of this year to commence the taper. Some analysts said Powell maintained a fine balance by decoupling tapering (i.e. reducing the pace of asset purchases) from tightening (raising rates). We wrote this week on whether central bankers will change their minds when facts change and whether they are scared by a taper tantrum more than what tightening may do to a nascent recovery.

Domestic investors too will be wondering at the implications of the Fed chair’s statement for foreign portfolio inflows. India’s economy is not in very great shape and we pointed out that in the September quarter, real GDP is likely to be below its level four years ago. The monsoons continue to be a source of concern as well, with a dry spell continuing. The Economic Recovery tracker found signs of stress in rural indicators.

Another of our trackers, the Herd Immunity Tracker reports that only 10 percent of the population is fully vaccinated and that is not enough to protect us from a third wave. On Friday, vaccinations crossed the 10 million mark and that’s very good but what’s required is that level needs to be maintained every day.

If you are wondering what to make of the fall in small and mid-cap stocks, then here’s our research team’s view on what investors should do. We had also written about signs of fatigue in the IPO market and explored the reasons for it and what lies ahead. One reason that was supposed to buoy domestic issues was the crackdown on China’s tech giants leading to funds getting diverted, but that does not appear to have happened.

Management issues were at the fore this week. We wrote on how Vinod Dasari’s abrupt exit from Eicher Motors poses a challenge though not the only one for the company. Then, Aurobindo Pharma decided against going ahead with its acquisition of Cronus Pharma as investors were critical of its capital allocation strategy. With the deal fiasco behind it, the company needs to do more to win back investor confidence.

But another pharma company Cadila Healthcare delivered positive news by getting emergency authorization for a COVID-19 vaccine. And, Divi’s Labs is getting a green edge.

As the pandemic lockdowns are lifted, we looked at the prospects of some consumer stocks such as Trent, Relaxo Footwear and CCL Products. If you are looking to capitalise on the revenge travel trend, then here’s a stock just for you and if you are looking for a longer term view, then read our take on IRCTC.

We highlighted how India’s thermal power plants could be staring at a coal shortage and what recent gas production trends are saying about the industry.

On steel, we wrote on how China’s efforts to cool down iron ore prices appear to be working, with steel output declining sharply in July. We also wrote how a second round of capex could support Kirloskar Ferrous’ earnings growth. And iron ore prices may be falling, but NMDC remains a dividend draw.

A government company Engineers India is our weekly tactical pick as we believe pessimism about its prospects is overdone.

Trade is a two-way street. The government is talking about a more pragmatic approach to free trade agreements, and wants exporters to be prepared for competition in some sectors. The government’s effort to run private train services has not taken off and we analysed why and what can be done.

The government’s efforts to identify alternative funding methods continue, given that its strategic disinvestment programme is taking a long time to show results. This week, it launched a National Monetisation Pipeline, under which certain identified infrastructure assets will be bid out to be managed by private parties. The government expects to get upfront sums that it can invest in new infrastructure projects, although ownership of the assets monetized will remain with the government. We wrote why that could be a win-win for all stakeholders, but also pointed out potential challenges. It all comes down to successful execution, creating a structure that’s attractive for private players and assuring a stable policy.

 

Cheers,

Ravi Ananthanarayanan
Ravi Ananthanarayanan
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