Midnight News Update – Nov 14th 2017
Retail inflation measured by CPI inflation touched a 7-month high of 3.58%, largely led by a sharp spike in vegetables inflation to 7.47%. Pulses inflation continues to be at -23% and the weak prices at mandis (on most occasions it is below the MSP) are only making matters worse for the farmers. However, the inflation continues to be well within the comfort level of 4% set by the RBI. The RBI will be betting that despite the inflationary impact of food and oil, the drastic reduction in GST rates across the board should have a strong anti-inflationary effect on prices,.
Equity mutual funds have seen record collections of 286,000 crore in the last 11 months since the onset of demonetization. Not surprisingly, the biggest beneficiary of the demonetization has been the equity mutual funds which are seeing a lot of money flowing in on the back of the TINA factor. The sharp fall in interest rates in the aftermath of the surge in deposits with the bank led to a surge in interest for equities. This is nearly double the inflows during the corresponding period of the previous year. That is also one of the reasons the markets have been largely stable despite aggressive selling by FPIs.
OPEC has forecast that the demand for oil could rise much faster in 2018 and that could result in a genuine deficit as far as the demand/supply equation is concerned. The total global demand for oil in the next year is expected to be 33.42 million barrels per day which will keep the upward pressure on oil. The US inventories are gradually falling and therefore it is failing to exert downward pressure on prices. With the OPEC and Russia persisting with their 1.8 million bpd cuts in supply, the prices may stay well above $64/bbl. That surely suits Saudi Arabia as it launches Aramco’s IPO next year.
The INR crumbled to a 1-month low of 65.42/$ on the back of sustained demand for the dollar from banks and importers. The increasing likelihood of a rate hike by the Fed in December is again raising the spectre of the dollar appreciating against most of the global currencies. With crude prices staying above the $64/bbl mark, there is now genuine concern that there may slippages on the fiscal deficit and the current account deficit. The slight slowdown in the IIP growth and the higher CPI inflation number are also contributing to the weakening of the INR.
A strange phenomenon is happening in the US because the yield curve is flattening. That means the gap between short term rates and long term rates is narrowing. Consider the following instances. Since the beginning of 2017, the spread between a 2-year bond and a 10-year bond has fallen from 125 basis points to 75 basis points while the spread between a 2-year bond and 30 year bond has fallen from 187 bps to just 119 bps. Normally, a flattening yield curve is a signal of a distinct slowdown in the economy where the confidence in the future is quite bleak. But this appears to be an outcome of the flawed practices of the Fed. By constantly hiking rates while inflation remains low, this dichotomy is created. That is because short term rates are sensitive to signals while long term rates depend on inflation.
The surprise economic pick-up may be coming from the Euro area after almost a lost decade virtual zero growth. According to Credit Suisse, the 19-member Euro area may be seeing the best ever growth in the last decade. Interestingly, it is the stocks with the greatest Euro Zone exposure that seem to be outperforming the others. The 2017 growth forecast for the EU region has already been raised from 1.7% to 2.2%. To a large extent the credit for this growth must go to the ECB which has managed to finally bring back growth with its persistent focus on an easy and liberally monetary policy.
