Moneycontrol Pro Weekender | Horses for courses

Dear Reader,

The scandal of the week was definitely the US CPI print coming in at a high 3.5 percent year-on-year for March 2024, higher than 3.2 percent for February. US bond yields moved up immediately, while market expectations of the Fed’s rate cut were pushed back from June this year to September. This FT story, free to read for Moneycontrol Pro subscribers, approvingly cites JP Morgan chief Jamie Dimon’s letter to shareholders this week, which talked of ‘stickier inflation and higher rates than markets expect.’

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But if inflation is a bugbear for the US, the opposite is true for China, where retail inflation came in at a meagre 0.1 percent year-on-year for March, once again raising fears of deflation and cries for more stimulus. Consumer price inflation in the Eurozone came down to 2.4 percent in March, prompting European Central Bank chief Christine Lagarde to hint at a possible rate cut in June. And in Japan, they are heaving a sigh of relief that inflation is on the upswing and this FT story says it may finally be becoming a more normal economy after years of negative interest rates. As far as policy rates go, we increasingly seem to have horses for courses.

One reason for the differences in inflation rates and monetary stance is growth. While the US economy grew at 3.4 percent year-on-year in Q4, 2023, for the Eurozone GDP growth was 0.1 percent.

India, of course, is an outlier on growth, with the Asian Development Bank pegging GDP growth at 7 percent for 2024-25 and 7.2 percent for 2025-26. Retail inflation fell in March 2024 to 4.85 percent, as expected, and core inflation remained low, but month-on-month food inflation was up a bit. As RBI governor Shaktikanta Das said in his monetary policy statement, ‘’The strong growth momentum, together with our GDP projections for 2024-25, give us the policy space to unwaveringly focus on price stability.’’ He also said ‘’The success in the disinflation process so far should not distract us from the vulnerability of the inflation trajectory to the frequent incidence of supply side shocks.’’ We wrote here about when India is likely to see the much-awaited cut in the policy rate.

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The Index of Industrial Production numbers for February 2024 show a pick-up in year-on-year growth, but that’s due to a base effect. Month-on-month, the IIP saw a contraction of 4.1 percent in February. The IIP numbers continue to show very poor growth in the production of consumer goods as well as capital goods.

But for the world as a whole, commenting on the Global Composite PMI for March, Bennett Parrish, Global Economist at JP Morgan, said: “The March PMIs signal a broadening global expansion consistent with ongoing solid growth. The global all industry output PMI advanced another 0.2-pts to 52.3, its highest level since June 2023, with all six of the survey's sub-sector indexes remaining in expansionary territory. Regional activity also looks to be coming into better balance, with another sizable rise in Europe while the US and China remained at reasonably elevated levels. The outlook is also strengthening, with forward-looking indicators for new orders and future output also moving higher on the month." It’s no wonder then that the Bloomberg Commodity Index has moved up sharply and is now at its highest level this year---here’s our story on global food inflation edging up.

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But while markets are near their peaks, there is an underlying sense of uncertainty. That is why gold prices are scaling new highs. Our columnists wrote about how investors should position themselves on gold and silver here and here. Indeed, IMF managing director Kristalina Georgieva said in a speech that while it is tempting to heave a sigh of relief based on current data, ‘The sobering reality is global economic activity is weak by historical standards. Prospects for growth have been slowing since the global financial crisis. Inflation is not fully defeated. Fiscal buffers have been depleted. And debt is up, posing a major challenge to public finances in many countries.’

The medium-term may not be as rosy as the markets are picturing it. The IMF says here that without ambitious steps to enhance productivity, global growth is set to fall far below its historical average. Unless remedial policies are undertaken, says the IMF, ‘growth could drop by about a percentage point below the pre-pandemic (2000-19) average by the end of the decade. This threatens to reverse improvements to living standards, and the unevenness of the slowdown between richer and poorer nations could limit the prospects for global income convergence.’ It says that reforms that enhance productivity and fully leverage AI are key for reviving growth in the medium term. It recommends focused policy actions to enhance market competition, trade openness, financial access, and labour market flexibility. In today’s geopolitical environment, it’s best not to hold one’s breath on trade openness and market competition. The IMF research also finds that ‘The potential of AI to boost labour productivity is uncertain but potentially substantial as well, possibly adding up to 0.8 percentage points to global growth, depending on its adoption and impact on the workforce.’

What is the impact of all this on the markets? It’s small wonder then that, given the promise of AI, the Magnificent Seven stocks have done so well. But as Mohamed El-Erian, president of Queens’ College, Cambridge and chief economic adviser at Allianz wrote in this FT column, the market is very unstable, adding that ‘’It requires reinforcement from better domestic fundamentals, a less problematic international order, and the materialisation of the promise offered by technology, life sciences and sustainable energy. That is certainly a possibility as currently priced in by markets, but it is far from guaranteed.’’

Incidentally, Jamie Dimon’s letter also had a clear message for equities. It said, ‘Equity values, by most measures, are at the high end of the valuation range, and credit spreads are extremely tight. These markets seem to be pricing in at a 70% to 80% chance of a soft landing — modest growth along with declining inflation and interest rates. I believe the odds are a lot lower than that.’

Cheers,

Manas Chakravarty

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

Stocks

What will a buyer be willing to pay for Yes Bank? Exide Industries, Gland Pharma, Aptus Value Housing Finance, Why are we equal weight on these two fertiliser stocks? Subros, FMCG: Has volume growth trend bottomed out? Titan, Solar Energy investors vulnerable to getting singed, Wipro, Why the stocks of these two small finance banks are for risk takers, Why this IT major’s valuation is a draw, 360 ONE Wealth