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In a case of how cheer for the economy may not be so for markets, investors in US stocks fretted over excellent jobs data. US businesses added 5,28,000 jobs in July, beating most estimates by an embarrassing margin. US 2-year treasuries rose after the report, as the market priced in a more certain likelihood of another 75-basis point rate hike by the US Fed. But the S&P 500 slipped, as investors pondered over what too strong an economy could mean for interest rates.
Those fears did not carry over to India, however, with the stock market rising by a strong 0.8 percent at 1.15pm. The RBI’s 50 basis point hike in the repo rate last week and its determination to stay in ‘withdrawal of accommodation’ mode is also not hurting investor sentiment. They appear to be factoring in a soft landing for the Indian economy, at least in how it affects the listed universe.
But investors should not become too complacent either. The RBI’s surveys show that inflation expectations have come down, but they still remain elevated, and the last time they were this high was September 2015. On the business front, capacity utilisation is trending up, inflationary pressures remain but there is strong optimism about a recovery. Do read our analysis for more details.
Business optimism may stem from improving consumer sentiment, which is now the best since the pandemic started. When consumers are in a good mood, they would tend to spend more and as the festival season nears, that’s an ideal frame of mind for companies to vend their wares, high inflation or not. There is some caution about future conditions, but those may be dispelled if the economic recovery lifts their incomes.
While the West may have a problem from entrenched inflation, the fiscal effort to quell prices does have some effect in the domestic market. The FAO Food Price Index has fallen for four months now and if that continues, it will lead to softer price trends, which matters for India’s import of edible oils. Decline in the prices of other commodities such as cereals is also good news, in that it sends deflationary signals to the domestic market, although there is no direct effect as trade is restricted by the government.
But there’s no certainty that the decline in prices will continue, given how volatile markets have been. In crude oil, for instance, my colleague Nitin Sharma writes on how Brent oil may have fallen by 22 percent since July but, “despite oil trading in the nervous nineties, there are still chances of it climbing back to around $100 for some more time”. Do read to know more and also on how this could affect oil stocks.
The fall in prices is also seen in fertiliser prices, as can be seen from charts in this tweet by the CRU Group. Fertiliser and raw material prices have declined, some rather sharply. This is good news for the government as a material decline will give it relief on the subsidy front.
There is a rather enticing prospect that we may decouple from western markets, as what is worrying them is not what we are worried about. The coming weeks and months should offer more clues on whether this is indeed happening. Much depends on whether commodity prices continue to fall and how hard the US Fed cracks the whip on inflation, and if India’s central bank takes a different path from what is anticipated.Investing insights from our research team
What else are we reading?
The US and China are decoupling, but not as fast as you think (republished from the FT)
Ravi AnanthanarayananMoneycontrol Pro