Weekly Report (16th SEP, 2023) : Better China data, further stimulus measures lift sentiment.

Global Developments

US August CPI came in line with expectations but PPI and Retail sales beat expectations this week. This resulted in firming up of US yields and overall Dollar strength

ECB hiked for the 10th consecutive time, lifting rates by 25bps, taking the deposit rate to a record 4%. It raised inflation forecasts for current year and next, each by 20bps. It indicated that further hikes may be off the table for now.  

China August Retail sales and industrial production data came in better than expected, indicating that stimulus measures undertaken so far are finally beginning to stabilize the economy. PBoC cut the Reserve Requirement Ratio for banks by 25bps to 7.4%, a move that will release more liquidity into the banking system and help stimulate the economy. 

Price action across assets

US 2y rose 5bps to 5.03% and 10y climbed 8bps to 4.34% this week

Dollar strengthened for the ninth straight week and ended almost at its strongest point against major DM currencies. Euro and Pound both ended the week almost 0.5% weaker. Australian Dollar was the exception, strengthening 1% this week on better China data, RRR cut by the PBoC and an uptick in commodity prices

Brent rose 3.5% to a 10 month high of USD 93.8 per barrel while Gold ended the week almost flat at USD 1916 per ounce. 

S&P500 and Nasdaq ended the week 0.7% and 1.3% lower respectively. FTSE outperformed gaining, 3.1% this week. Prospect of global central banks reaching the end of their rate hike cycles and improvement in China data resulted in FTSE having its best week since Jannuary. CAC and DAX too were up 1.4% and 0.6% respectively this week 

Domestic Developments

August CPI print came in at 6.83% yoy against expectations of 7% and July print of 7.44% on softer vegetable prices. Core inflation eased to 4.8% yoy.

WPI remained in deflation territory for the 5th straight month, coming in at -0.52% for August. 

Goods trade deficit came in at a 10 month high at USD 24.2bn against expectations of USD 21bn. Gold Imports surged 39% to USD 4.9bn MoM on festive season related buying. Cereal exports have dropped on export restrictions. Services surplus held up in August at USD 12.4bn, almost the same level as in July. 

FX Reserves fell USD 4.9bn to USD 593.9bn in the week ended 8th September. 

Equities

Nifty gained 1.9% this week to end at a record high of 20192. Midcap and Smallcap indices underperformed the benchmark this week on account of a sell off that followed news of Socgen hedge fund manager front running trades in that space. Below is how the various sectors performed. 

Bank Nifty 2.4%
Nifty IT 2.9%
Nifty auto 2.1%
Nifty metal 0.8%
Nifty energy -0.4%
Nifty FMCG 0.2%
Nifty Pharma 2.2%

We continue to remain upbeat on domestic equities and prefer entering from the long side on dips. We believe there is room for another 3-4% up move in Nifty from current levels. 

Nifty 50 TTM P/E stands at 22.8.  FPIs have withdrawn net USD 0.5bn from domestic equities in September so far. 

IFA Global Quant based investment model is indicating a moderately bullish bias towards equities. Compared to its benchmark having 60-30-10 composition of equities(domestic plus usa), debt and gold, the model is indicating being overweight equities with a portfolio weight of 70%. (Based on the model's quant variables, equity allocation would vary between 40% and 90%.)

Bonds and Rates

It was a volatile week for bonds. Yield on the 10y had dropped to 7.12% on Thursday on news that Indian bonds could be included in JP Morgan Emerging Market bond index later this month. However the move fizzled out on Friday with yield rising back to 7.20%. 1y OIS ended almost unchanged at 7.06% while 5y OIS ended 4bps higher at 6.76% on an uptick in crude prices. 1y t-bills are yielding close to 7.04% while 1y CDs are yielding 7.40%. Liquidity in banking system has tightened with banks borrowing close to Rs 45000crs from RBI in MSF. Overnight call rate fixed at 6.86% on Friday. 

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USD/INR

It was a fairly range bound week until Friday. Rupee weakened on Friday to end at 83.18. There was a late spike as August trade deficit came in higher than expected. 

We expect the RBI to intervene to protect Rupee from weakening to all time lows given that CNHINR is now comfortably above the 11.30 mark. 

We expect the Rupee to trade a 82.80-83.50 range in coming week with sideways price action. Key trigger would be the US Fed rate decision. 

1y forward yield ended at 1.8% while 3m ATMF implied vols ended at 3.63%

IFA Global hedging barometer unchanged at 123 is indicating a moderately bearish outlook on Rupee over the medium term (Range 36-180 with 36 indicating extreme bullishness)

Exporters are advised to tread cautiously until Yuan and crude relent. Importers are advised to consider increasing their hedge ratios through RRs

Key Data and Events

Wednesday: UK August CPI, US Fed rate decision and economic projections 

Thursday: BoE rate decision, US jobless claims

Friday: BoJ rate decision, UK retail sales, US Manufacturing and Setvices PMI

Expected Ranges and Bias

EUR/USD: 1.0610-1.0750 with sideways price action

GBP/USD: 1.2340-1.2520 with sideways price action

USD/JPY: 146.50-148.50 with downside bias

USD/INR: 82.80-83.60 with sideways price action