Moneycontrol Pro Weekender | Mr Bond gives the markets a scare

The minutes of the Fed meeting, which showed that some members wanted to hike rates in June, were the initial trigger, amplified by the ADP Employment Report

Dear Reader,

Just when the equity markets seemed to have shaken free of gravity, the bond markets in the US reminded everybody this week that they are the true arbiters of market destiny. The minutes of the Fed meeting, which showed that some members wanted to hike rates in June, were the initial trigger, amplified by the ADP Employment Report, which said almost half a million jobs were added in June, far more than the 225k expected and the 267k jobs added in May.

That led to US bond yields spiking up, the US dollar firming and a sell-off in the equity markets. The worry, of course, is that the US Fed will have to tighten even more to cool down the jobs market. These fears echo the question that Martin Wolf asked in the Financial Times (free to read for Moneycontrol Pro subscribers): ‘Will what we are now experiencing prove an enduring shift in the monetary environment or just a temporary one?’

Thankfully, Friday’s US Non-Farm Payrolls report showed job growth in June was below expectations, the first miss since April 2022. That’s not all—estimates for May and April too were revised down, although hourly earnings growth is still high.

The equity markets have been betting that the inflationary episode is over, rate hikes are almost done and we can go back to business as usual. The AI revolution, which is in its initial stages, is powering the rally in US tech stocks.

The NFP report will stem the market’s worst fears, adding to hopes that the economy is slowing gradually. A 25 basis point hike at the FOMC’s meeting this month, though, is baked in. At the time of writing, US bond market yields were all over the place, undecided whether the jobs growth number was slow enough. As Jason Furman, Harvard professor and former director of the National Economic Council of the US tweeted, ‘Overall nothing in this report will or should deter the Fed from hiking at the next meeting. Labour markets still hot. Inflation stubbornly high. Maybe some small moves towards a soft landing but a long and likely improbable way to go.

Since we are talking about bonds, this could be the right moment to recall the theme song from the James Bond movie ‘Octopussy’----‘All Time High’, sung by Rita Coolidge. She sings:

‘On an all time high,

We'll take on the world and win

So hold on tight, let the flight begin.’

And what a flight it has been. The Indian equity markets have been scaling all-time highs. But, as our columnist Ajay Bagga writes, the challenge of the second half of the year is to manage a soft landing amid soaring markets and stubborn inflation.

Chris Williamson, Chief Business Economist at S&P Global Intelligence said of the US PMI data, ‘Higher wages in particular are driving costs up, and could keep selling price inflation stubbornly elevated in the months ahead.’ The JP Morgan Global Composite PMI for June and indeed the US Composite PMI too show private sector activity expanding from the previous month, due to strong growth in services.

Yet some still believe that a US recession is inevitable, it has just been postponed. A new Financial Conditions Index unveiled by Fed researchers says current financial conditions are expected to be a drag on GDP growth by 75 basis points over the next year. The reason why it is taking longer than usual for US monetary policy to work, says a note from Jefferies, is because of the role played by unregulated shadow banking in this credit cycle. The risk is, as this article points out, is that it might take higher policy rates than the market now anticipates to curb the second-round effects of inflation in labour and other markets, as people try to recoup income that has badly shrunk in real terms.

In other words, higher for longer is the mantra. This research piece by the Kansas City Fed says, ‘A tightening in the stance of policy of a similar magnitude to what has occurred over the past year is expected to slow inflation gradually and modestly, lowering year-over-year core PCE inflation by 80 basis points by the end of 2026.’

It’s no wonder then that with higher yields, this FT piece says, ‘Cash rules everything around me, as the Wu-Tang Clan observed in their mid-90s hip-hop classic that now serves as a handy soundtrack to financial markets.’ If you like hip-hop, here’s the song.

Emerging markets, on the other hand, are better placed. Ruchir Sharma tells us, ‘Among the 25 largest emerging economies, three-quarters of those reporting data have beaten growth forecasts this year — some, including India and Brazil, by a wide margin.’ It’s no surprise then that foreign portfolio inflows are pouring into the Indian markets. A recent research note by Nomura says Asian central banks should soon decouple from the Fed.

Others are not so sure. Arun Srinivasan, Head of Fixed Income at ICICI Prudential Life Insurance told us in an interview that the RBI will cut rates only in the first quarter of 2024-25. Food prices are rising and the PMI data for India showed selling price inflation accelerating to the strongest in a decade. India’s manufacturing PMI was the strongest in Asia, but it also signals higher core inflation.

Unsurprisingly, the all-time highs in the market led to lots of speculation about whether India’s perceived Goldilocks economy can be sustained for long; do’s and don’ts for investors;  whether investors should stay put or book gains; whether the rally has legs; and why it’s prudent for investors to not bother about all-time highs in markets but instead stay focused on their goals. Softbank’s Rajeev Misra, in this interview, told us that startup investors overestimated India’s market. This piece pointed to the Indian market’s rich valuations and said investors should keep a close watch on crude oil prices.

As for the Indian economy, consumer expert Rama Bijapurkar highlighted the gaps in India’s consumption story and how to fix them. We pointed to high demand for work under the rural employment guarantee scheme and asked whether it was a sign of rural distress. And our Monsoon Watch column said that ‘If El Nino leads to any tightening in the supply of rice and/or other agri-commodities in India and other key exporting countries, we will likely see essential food items and consumables getting costlier.’

I leave you with these charts from the London International Vintners Exchange, whose Liv-ex indices tracks the prices of the world’s most traded fine wines. The good news—they’re all trending down.

Cheers,

Manas Chakravarty

Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks 

Mixed run continues for autos; What to do with Coforge after the recent rally; Will Senco Gold glitter? Cera Sanitaryware—why the caution? Aptus Value; Why investors should consider this mutual fund distributor; Cochin Shipyard; KIMS; Will rising deposit mobilisation give wing to bank profitability? Weekly tactical pick; Titan; FMCG: What should investors expect in the June 2023 quarter?

Markets 

Industrial stocks are chasing momentum

Smaller stocks drive higher cash market transactions

China’s slowdown galvanises zinc bears

In the Money: how to track market pulse using statistics

China’s gas deals with Qatar

Traders in energy markets should pay heed to weather-induced cyclicality

What the NSE-TAP case is all about

Financial Times 

Recession odds fall, a bit

What equity markets got wrong about China

Threads vs Twitter

Geopolitics 

The Eastern Window: SCO meet

Limited options for oil cartel

The death of the dollar and the yuan’s rise: cutting through the hype

Economy 

Economic agenda of the BJP government

The pain at the bottom of the corporate pyramid

Personal Finance 

How investors should approach microcaps

Is NPS the best retirement planning tool?

NFO of Canara Robeco Multicap Fund: should you invest?

Tech & Startups 

Interview with Pawan K Goenka, Chairperson of the Indian Space Promotion and Authorisation Centre (IN-SPACe)

Indian unicorn employee addition falls sharply

Deep Tech startups set to take off in India

Are large contracts making a comeback in Indian IT sector?

Companies and industries 

Are FMCG stocks at risk of running out of gross margin-fuelled steam?

The blockbuster drugs lined up by Indian pharma for US launch

Why lower energy costs may not be a bonanza for cement firms

Untimely rains weigh on Coal India’s sales volumes

India’s drone industry is shaping up to be a disruptive force

LTMindtree stock enters big league; its operating metrics less so

New office supply could impact rentals

Jio looks to prise open the bottom of the pyramid with sub-Rs 1000 phone

Samvardhana Motherson

Banking and finance 

NBFCs chasing retail loans—reason for concern?

Bank’s growing reliance on CDs

Will banks come back to microfinance?

The Green Pivot 

Green credit could be a game changer

ESG’s Wild West gets a new sheriff

India energised with the triad of Surya-Vayu-Jaiv gas

Policy 

Gallium, germanium: How much is at stake for India’s chip strategy?

Bogus invoices bare the gaps in the GST structure

Critical minerals—draw up a to-do list

Six years of GST—the way forward

India’s drug regulations need complete overhaul

Politics 

Ajit Pawar’s revolt upsets opposition unity plans

Democracy, social media and influencers

Governor vs DMK spat plumbs new depths

Others 

Safety commission report on Balasore train accident damns railways

India’s ‘grey’ market remains under-exploited

Guruspeak