Indian Markets Could Be Subdued On Mixed US Inflation Signals

The S&P 500 rose marginally Thursday as Wall Street digested fresh inflation data. The broad market index climbed 0.1%, while the Dow Jones Industrial Average traded near the flatline, reported CNBC

12 April 2024 12:00 PM GMT
On Episode 267 of The Core Report, financial journalist Govindraj Ethiraj brings you the latest in Business and Market news. We also feature an excerpt from the recent The Core Report: Weekend Edition featuring Ravi Kant, former CEO and Vice Chairman of Tata Motors.

Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (01:00) Indian Markets Could Be Subdued On Mixed US Inflation Signals
  • (02:56) Crude Oil Prices Fall, Balance Between High US Inflation Data And Increased Middle East Tensions
  • (05:08) Goldman Sachs And Morgan Stanley Raise China Outlook
  • (07:02) Tesla’s Likely Investment Announcement Comes Bang In Election Season
  • (09:43) The Link Between Infrastructure & New Products Innovations, The Ace Story
  • (15:01) The Cobweb Effect In Economics, From Tomato In India To Cocoa In Africa

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.


Indian Markets Could Be Subdued

Indian markets are likely to open a little lower today or subdued following higher than expected inflation numbers in the United States on Wednesday.

Which in turn means that interest rate cuts which were expected in June are now being projected for several months later.

Which means obviously that capital will stay in or closer to debt than equity, whether on Wall Street or elsewhere in the world.

The Dow Jones already fell sharply on Wednesday.

However, Wall Street recovered on Thursday after wholesale inflation numbers came in lower and thus provided some relief.

The S&P 500 rose marginally Thursday as Wall Street digested fresh inflation data. The broad market index climbed 0.1%, while the Dow Jones Industrial Average traded near the flatline, reported CNBC

Indian markets were closed yesterday or Thursday for Eid and will reopen today.

To recap Wednesday’s movements, the BSE Sensex ended with gains of 354 points, or 0.47 per cent, at 75,038 levels, while the Nifty50 closed at 22,754, up 111 points or 0.49 per cent.

The Index is now above the 75K mark and it is moving fast.

The Business Standard says it took just 80 trading days for the benchmark index to move from 70,000 to 75,000.

The latest addition of 5,000 points is the third fastest since the index was established. The fastest addition of 5,000 points came from August 13, 2021, to September 24, 2021, when Sensex moved from 55,437 to 60,048 in 28 days.

The market capitalisation of the Sensex as a percentage of the total market capitalisation is at 37 per cent, the lowest compared to where it was when the previous milestones were reached.

And this is because of the recent rally or perhaps frenzy in mid and smallcap stocks.

Crude Is Balancing Between Inflation And Middle East Tensions

Crude oil futures fell on Thursday as worries about inflation overshadowed fears of a potential Iranian strike on Israel for the moment.

The June Brent futures contract fell 50 cents, or 0.55%, to $89.97 a barrel.

Oil prices had risen more than 1% Wednesday following reports that the U.S. and its allies see an Iranian strike against Israel as imminent.

Elsewhere, the Vienna based Organization of the Petroleum Exporting Countries has left its estimates for global oil-demand growth unchanged, but lowered its forecast for non-OPEC supply growth for this year and next.

OPEC said in its monthly report that it continues to expect oil demand to grow by 2.2 million barrels a day this year and by 1.8 million barrels a day in 2025, unchanged from its previous estimates.

The group cut its non-OPEC supply growth forecast to 1 million barrels a day for 2024 from 1.1 million barrels a day previously, saying the main drivers of growth are expected to be the U.S., Canada, Brazil and Norway.

Everyone is watching the central banks for interest rate moves and the European Central Bank usually is the second most watched after the US Federal Reserve which of course is unlikely to do much for the next few months.

The European Central Bank kept interest rates at record highs on Thursday but sent an even clearer signal that it may be preparing to cut them as euro zone inflation continues to fall, REuters reported.

The central bank for the 20 countries that share the euro currency kept its deposit rate at 4.0%, where it has been since September as part of a 1-1/2-year effort to rein in prices.

Interestingly, inflation in the Eurozone is close to the ECB's 2% target. Moreover, bank lending is at a standstill and the economy is barely growing.

Not surprisingly, the ECB dropped fresh hints about a possible cut at its next meeting, Reuters reported.

Goldman, Morgan Raise China Outlook

Goldman Sachs Group Inc. and Morgan Stanley raised their outlook for China’s economic growth this year as factory activity and exports accelerated more than expected, Bloomberg is reporting.

China’s economy likely expanded at a 7.5% annualised pace in the first quarter from the prior three months, Goldman economists led by Hui Shan said in a note Wednesday — higher than their 5.6% prior estimate.

The bank now sees 2024 growth forecast at 5%, in-line with Chinese policymakers’ target, versus 4.8% previously.

Morgan Stanley also lifted its 2024 growth forecast, to 4.8% from 4.2% previously, citing better-than-expected export growth from resilient US demand and robust export volume.

The report also projected stronger capital expenditure in the manufacturing sector, according to a report dated Wednesday.

The upward revisions come after a key gauge of factory activity — the Caixin manufacturing PMI — indicated a fifth straight month of expansion in March, with official government data also showing a rebound. Exports have also increased amid rising global demand for technology goods.

“Recent China macro data have been solid,” Goldman’s economists wrote in the note, adding that the manufacturing data “suggests the Chinese economy found a local bottom in late 2023 and is on the way up.”

Goldman also cited robust tourism, with spending above pre-pandemic levels during the Qingming festival last week.

Meanwhile, Uday Kotak, founder of Kotak bank said in a tweet reproduced faithfully across websites that China was imploding economically.

Strong words and quite possible of course.

Possibly he knows something that Goldman Sachs and Morgan Stanley, who incidentally are quite bullish on India as well, don’t know.

Tesla’s India Investment Coincides With Election Season

News coming in via Reuters suggests Tesla CEO Elon Musk is visiting India in the week of April 22 to finally announce a Tesla onground investment in India.

The proposition of course as you might know allows sharply reduced duties on imports against a commitment of investment on ground in subsequent years.

More specifically Under the new EV policy, companies that would set up manufacturing facilities for EV passenger cars will be allowed to import a limited number of cars at lower customs/import duty of 15 per cent on vehicles costing USD 35,000 and above for a period of five years from the date of issuance of the approval letter by the government.

Right now, cars imported as completely built units (CBUs) attract customs duty ranging from 70 per cent to 100 percent, depending on the type of fuel, engine size and cost, insurance and freight (CIF) value below or above USD 40,000.

Like I said, Tesla’s investment in India is priced in. Meaning it has been announced so many times as imminent including the size of car, price and when it will roll out that a fresh announcement combined with a visit by CEO Elon Musk and meeting with India’s Prime Minister Narendra Modi seems more for the flashbulbs, or a small electoral nudge to voters for the general elections which start on April 19.

Nevertheless, Tesla’s arrival has been imminent for a while and an investment seemed forthcoming event in June last year.

That did not of course happen for various reasons including Tesla maybe wanting to export first and explore on ground investments later.

Tesla appears to have got what it wanted including the creation of an entire EV policy which has been tailored to its needs though it ought to benefit other car makers as well.

The present Government who has been moving heaven and earth to get Tesla into India.

Tesla itself is grappling with a bunch of issues including a declining market and market share and cratering stock apart from founder Elon Musk who is grappling with other issues including the goings on at Twitter, now called X by him.

Tesla’s arrival into India is rightly seen as an Apple moment, as in the setting of a manufacturing ecosystem that will attract more people in the higher technology and renewables space.

It's good if it happens of course though in what precise shape and form is something we have to see.

The Link Between Infrastructure And Products And Service Innovations

Well this is not a treatise on what infrastructure does or can do but a single yet illustratively powerful example of what the market can do when given new inputs, for example in the form of infrastructure.

There is nothing dramatically new in this theory or conclusion but it gets a little interesting because of when this particular example took root.

On The Core Report’s Weekend Edition, I spoke to Ravi Kant, former CEO and Vice-chairman of Tata Motors.

It was in his tenure that the Tata Ace, a mini truck was launched in 2005.

The mini truck as a concept has stood the test of time and is now sold as Ace Gold in petrol, diesel and CNG versions.

Mr Kant told me one inspiration for the Ace was the increased road connectivity at the time with more rural and urban areas getting connected.

The quest then for a last mile delivery solution then led to the Ace, also a substitute for three wheelers who were doing the job.

In my conversation with Mr Kant, which started off with a discussion on his book, Leading From The Back, I asked him where the idea for Ace came from.


The Cobweb Effect In Economics

A quick look back at last year. You may recall tomato prices in July last year had crossed Rs 200 per kg.

Some two months later, farmers were dumping tomatoes on roads because there was excess.

This, as Crisil chief economist D K Joshi pointed out earlier this week as well, is the cobweb phenomenon of cyclic price fluctuations in economics. It usually applies to agricultural goods and we see it frequently.

This also makes vegetable inflation, running at 30% currently, tough to forecast. Because prices can crash as suddenly as they shot up.

It works like this. Low prices one season discourage farmers from planting from the next season.

So prices skyrocket in the next season due to limited supply, This makes farmers increase the supply.

Then, the increased stocks must be sold immediately due to the perishable nature of the goods causing prices to decrease rapidly, setting the vicious cycle into play again.

There could be additional problems this year, including because of heat waves which could affect production and supply.

The same story is playing out in cocoa.

You might remember us mentioning that cocoa prices had shot upto $10,000 per tonne from below $3,000 this time last year.

Bloomberg is reporting how in Africa, this jump in coca prices, the key ingredient in chocolate, is luring farmers in some parts of Africa back to the bean.

The lag between the time it takes to plant and harvest a cocoa tree means the incipient trend won’t yield an instant fix for strained global supplies, but it could ease the squeeze down the line.

In the top two world producers, Ivory Coast and Ghana, cocoa farmers receive a price set by the government to ensure income predictability. But growers in Cameroon and Nigeria are free to sell to the highest bidder. And domestic cocoa prices in the two countries have more than tripled from a year earlier, spurred by a global shortage, says Bloomberg.

In Cameroon, one farmer has hired two extra workers on his small farm in Cameroon and switched from growing plantains, groundnuts and cocoyams back to the cocoa he gave up on three years ago, when prices were lower.

The Ivory Coast and Ghana account for more than 50% of global supply but farmers there have been hit by bad weather and a shortage of fertiliser.

Growers in South America are also keen to expand production to cash in on cocoa’s high price. Ecuador, the world’s third-biggest producer, is targeting 800,000 tons by 2030, from 454,000 tons in 2023. Brazil, the No. 6 producer, plans to double volume by the end of the decade from 220,000 tons.

Well, cocoa prices could rightly benefit farmers in Africa or Latin America down the line, hopefully better storage solutions and logistics will ensure we don’t see a repeat of wild tomato price fluctuations in India this year

Updated On: 12 April 2024 6:00 AM GMT
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