Dear Reader,
Everybody in the markets now knows about the immediate causes of the recent bout of nervousness in the markets. The worse-than-expected US unemployment data triggered expectations of an imminent 50 basis points cut in the US policy rate, while at the same time the Japanese central bank raised its policy rate and signalled more in the offing. That led to a sharp appreciation of the yen and an unwinding of the yen carry trade. If we cared to look, all this had been predicted back in 2019 in an IMF paper, about which we wrote here.
The intriguing chicken-or-egg question of whether the equity sell-off led to the unwinding of the carry trade or vice versa is explored in this FT story, free to read for Moneycontrol Pro subscribers. Ananya Roy explained the process in detail.
At bottom, though, it’s all about leverage, about where can we borrow at the cheapest rate. Japan, which had kept interest rates ultra low, ignoring the monetary tightening in the rest of the world, was the obvious place. The change in monetary policy in Japan gave the trade a jolt.
What the US non-farm payrolls data had damaged last week, the Initial Jobless claims numbers repaired this week. The initial jobless claims were lower than expected, indicating that the US labour market was not going to hell in a handbasket any time soon, as the unemployment data seemed to have led the markets to believe. Both these data points are for one month and will be revised and re-revised later. But the markets, priced for perfection, paid no heed to that and panicked. Unwinding leverage did the rest of the damage. It took cooing noises from the Bank of Japan and the solace of the jobless claims report to calm the markets. By Friday, the Fed Funds futures markets still had a 54 percent probability of a 50 basis point rate cut at the Fed’s September meet, but that was much lower than the 74 percent probability a week ago. The yen, though still strong, had climbed down from the giddy heights reached earlier during the week.
The PMI data showed the US private sector, especially services, in fine fettle and Chris Williamson, Chief Business Economist at S&P Global said it was ‘indicative of the economy continuing to grow at the start of the third quarter at a rate comparable to GDP rising at a solid annualized 2.2% pace.’ That’s hardly the signal for a panicky 50 basis point rate cut. And with selling price increases cooling, the soft landing story is back in play. This FT story had the headline: ‘US stock market fall: everyone calm down’, while another one said ‘The Federal Reserve will not let markets dictate a rate cut.’ There is little doubt, though, that there will be soon be rate cuts in the US, which my colleague Madhuchanda Dey says should brighten the prospects of Indian IT companies.
On the other hand, with Japan’s July PMI showing a return to growth and relatively high inflation, it may not be the end of rate hikes in the country. That worry should keep a lid on carry trades, for some time, lowering volatility. JP Morgan said on Thursday that three quarters of the carry trades had already been unwound.
While all these storms were happening around central banks in the US and Japan, the Reserve Bank of India presented a picture of masterly inactivity. Its monetary policy committee delivered exactly what was expected---it changed nothing. RBI chairman Das reiterated that headline retail inflation would need to fall sustainably to 4 percent for the central bank to budge. What’s more, my colleague Neha Dave wrote that bond yields would drift lower despite the RBI’s status quo. In other words, a rate cut despite the RBI.
The problem, though, as Aparna Iyer points out, is that consumers do not seem to share the RBI’s rosy assessment on growth. To take one yardstick, in response to the question whether income has been higher than a year ago, in the RBI’s consumer survey in July 2024, 24.9 percent it had declined, more than the 24.4 percent who said it had increased.
We pointed out that for the corporate sector both revenue and earnings growth is set to moderate in FY25. At a time when India’s Buffett indicator has been flashing warning signals, a deceleration in earnings growth would be most unwelcome.
Perhaps, as our columnist Vijay Bhambwani writes here, markets are now shifting from a countercyclical to a procyclical phase, and the transition is painful.
This week, the markets echoed Homer Simpson’s famed Bee Monologue, in which he says, while guarding a pile of sugar, ‘I can't live the button-down life like you. I want it all: the terrifying lows, the dizzying highs, the creamy middles. Sure, I might offend a few of the bluenoses with my cocky stride and musky odours - oh, I'll never be the darling of the so-called "City Fathers" who cluck their tongues, stroke their beards, and talk about "What's to be done with this Homer Simpson?’
To which Marge replies, ‘Look. Just get rid of the sugar, okay?’
Here’s the video.
Homer got it right. What would the markets be without the sugar rush?
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
India Shelter Finance, Bharat Forge, Saregama, Protean eGov Technologies, Syngene, SBI, Sagar Cements, Syrma SGS, SJS Enterprises, Hindalco, NCC, EIH, Dhanuka Agritech, eMudhra, Titan, Delhivery, Thermax, Bharti Airtel, FirstCry IPO, Unicommerce eSolutions IPO, Marico, Divi’s Lab, Britannia, TVS, Tata Power, Motherson Sumi Wiring, Vijaya Diagnostic Centre, VIP Industries, Godrej Consumer, Blue Star, Cummins India, Pidilite, Weekly tactical pick, Eicher, Lemon Tree Hotels, PI Industries
Financial Times
Asset managers fret over lost gains as investor cash piles up on sidelines
What burger flipping tells you about the US economy
The IEA’s divisive mission to decide the future of oil
Markets
Cryptocurrencies fail safe haven test, gold clears it
FPI holding at 12-year low, what it implies for markets
Companies and sectors
Sun Pharma, SBI, Indian steel, Digital risks and banking, Suzlon,
Economy & Policy
Implications of long term capital gains amendment
Will Wayanad be a wake-up call for firm climate action?
Why is bank credit growth slowing?
Quota Judgement: Reforming reservation will not be an easy task
Socialising losses is a bad idea, but PSBs have been doing it all along
Jobs’ policy pivot can cure ailing consumption engine
RBI should rethink the proposed liquidity norms on tech-enabled retail deposits
Geopolitics
Bangladesh’s economic success was built on sand
Turmoil in Bangladesh may be a policy challenge for India
Escalation in Middle East crisis adds to uncertainty on global trade
Personal Finance
Nifty Alpha or Momentum: Which index captures market trends better?
Don’t conflate asset allocation with diversification
Tech & Startups
GenAI, rather than the Anti-Trust verdict, may be the bigger threat to Google
With SaaS industry at a crossroads, how are companies coping?
Auto sector slump hits ER&D companies in Q1, recovery expected only next fiscal
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