Moneycontrol Pro Panorama | It’s a recession…it’s a slowdown…it’s a soft landing

The core inflation has fallen in every month of calendar 2023, it shows weak pricing power and supports the case for interest rates heading lower eventually.

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Looking at the silver lining is a common affliction among investors, who have been egged on in recent decades by indulgent central banks. The broad market is up by a solid 1 percent at 12.40 pm as a bunch of macro data is being interpreted as being bullish for equities.

India’s IIP data, for example, shows output has risen by 5.2 percent over a year while manufacturing has risen by 5.7 percent. That appears decent for sure, but the right comparison is with the pre-pandemic data. That shows a 4-year compound annual growth rate of a mere 1.7 percent for IIP and 1.2 percent for manufacturing. That’s not as great as the headline numbers look and suggests that industry is still punching below its weight.

Or, look at inflation data. As Manas Chakravarty points in his aptly titled piece ‘The good, the bad and the beautiful in the Indian and US inflation prints’, India’s retail inflation came in at higher than one would like or have expected, at 4.8 percent in June. Food inflation was the main culprit with vegetable prices rising sharply due in part to a spike in tomato prices. That is expected to continue in July as well. But the RBI had already anticipated higher inflation in its forecasts and that means it may not view this data point as a big risk. It may, if matters get worse, as the South-West monsoon is a factor to watch, what with heavy rainfall in parts of the country affecting agricultural activity, while on the other hand, the El Nino effect is also in play.

However, the silver lining lies in core inflation which declined in June compared to May. Core inflation in this case strips out the effects of food and fuel, two groups that tend to be volatile. That core inflation has fallen in every month of calendar 2023 shows weak pricing power and supports the case for interest rates heading lower eventually.

But the really good silver lining comes from the US. In the latest edition of the Pro Weekender, we had pointed out how US equities dipped and then bounced back. The weekend brought news of US non-farm jobs growth missing expectations, for the first time since April 2022. Not so great news for the economy, but good news for equities. This was enough to swallow worries from earlier in the week due to a hawkish tone visible in Fed minutes and a solid ADP employment report. “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,” we wrote.

That’s playing out in the current week as well. US inflation in June rose by 0.2 percent over May and by 3 percent over a year ago. As Chakravarty writes, “The odds of an Immaculate Disinflation, or a soft landing, have gone up.”

While the monsoons are one uncertain factor, another would be earnings. But even here, the market seems to be looking at the brighter side. TCS’s shares are up by 3 percent at 12.40 pm after its results. This is, despite, as Madhuchanda Dey points out in her analysis of the results, a reduction in discretionary spending affecting performance, margin erosion and the company not guiding for better times in the second half of FY24. HCL Tech’s results disappointed as well, but even its shares are up by 0.5 percent at 12.40 pm.

Maybe, the silver lining investors are seeing in these stocks is that the US Fed’s pause may turn into a pivot and the rising economic tide that follows will lift IT stocks once again.

Investing insights from our research team

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Technical Picks: Paytm, Lupin, HDFC AMC, Federal Bank and Zinc (These are published every trading day before markets open and can be read on the app).

Ravi AnanthanarayananMoneycontrol Pro