Will the BOJ Be Next to Hike Rates?

The US current account deficit fell 3.1% to US$112.4 billion in the fourth quarter, its lowest level in more than a year. The fourth quarter current account deficit is 2.4% of GDP, down from 2.5% in third quarter. The current account deficit for 2016 stood at US$481.2 billion, a 3.9% increase from 2015. This accounts for 2.6% of GDP, a significant drop from record high of 6.3% of GDP in fourth quarter of 2005.

US mortgage application activity fell 2.7% to 406.8 in the week ending March 17 from 418.1 the week prior. It fell from a near four-month high as the cost for 30-year home loans rose to their highest level in three years.

As per Equipment Leasing and Finance Association (ELFA), US companies borrowing to spend on capital investment fell to US$5.9 billion, 3% down YoY and 5% down from January. The ELFA said its confidence index fell to 71.1 in March from 72.2 in February. A reading of above 50 indicates a positive outlook.

US new home sales surged to a seven-month high in February. It increased 6.1% to 592,000 from 558,000 in January. The existing home sales saw a drop of 3.7% in February amid tight inventories and rising house prices.

US property loans also grew by 5.8% in 2016 from a year earlier to US$2.96 trillion. The growth was in line with the appreciation in property values in 2016.

This is all quite positive for the US economy. Will it help Fed achieve its outlook for two more 0.25% hikes in 2017, and three more increases in both 2018 and 2019 to reach at a long-term 'normal' of 3%?

Recently, the US Federal Reserve hiked interest rates by 25 basis points from 0.75% to 1%.

We doubt the Fed's capacity to further raise interest rates. As Bill Bonner wrote recently in Vivek Kaul's Diary...

    You know our prediction: The Fed will never willingly lead interest rates to a neutral position.

    It can't. It has created a debt monster. It must feed this Frankenstein with easy credit.

Moving on to news from Japan...

Japan's exports grew the most in more than two years in February. They were up 11.3% YoY highlighting an economic recovery led by overseas demand.

Exports to China, Japan's biggest trading partner, rose by 28.2% YoY in February. This was led by demand for auto parts from China and electronics components demand from Hong Kong. The trade surplus with China stood at 111.8 billion yen.

Exports to the US rose to 0.4% YoY in February due to bigger shipments of cars and auto parts. Japan's trade surplus with the US rose by 1.5% to 611.3 billion yen.

Japan's total trade surplus stood at 813.4 billion yen. Overall export volumes are up 8.3% YoY.

Japan is also in talks with the European Union to reach an economic deal, and stressed the importance of free trade to the country. The European Union is also keen to complete the negotiations for a free trade agreement and a strategic partnership agreement with Japan.

The is all quite positive for the Japanese economy.

Nevertheless, Bank of Japan (BOJ) board members and other policy makers denied the near-term withdrawal of central bank's massive monetary stimulus. They said it would be premature to consider raising interest rates. The BOJ's inflation target of 2% is still far off the mark. The BOJ still has plenty of work to do to reach its 2% inflation target.

If there's one place on this planet that epitomises all the wrong kinds of growth, it's Japan. Too much money printing...too much debt...too much government intervention...too much stock market manipulation. That said, a near-term rate hike by the BOJ seems highly unlikely.

Indian Stock Markets Follow Lead from Global Indices

Indian share markets took cues from global markets. The BSE Sensex was down 0.77% for the week, while the NSE Nifty was down 0.57%.

Realty (+2.31%) was the biggest gainer. Telecom (-3.37%), Auto (-1.13%), and IT (-1.39%) were the top losers for the week.

As per a leading financial daily, the government has made a fresh proposal to limit cash transaction at Rs 2 lakh. The intention here is in line with the proposed Budget measure aimed at discouraging black money by restricting cash transactions to Rs 2 lakh from Rs 3 lakh.

The above proposal was among fifty amendments moved by the government to give effect to Budget announcements as Parliament took up discussion on the finance bill.

It, along with Notebandi, is part of the government's fight against black money.

The above move also comes in line with the government's push to boost digital transactions and to make them more attractive than cash.

The government expect India to move in the direction of becoming a cashless economy. However, we must ask: Is it in India's interest to move towards a cashless society?

We don't think so.

The fact is that India is not ready to go digital. We pointed out the challenges to India's digitisation. And Vivek Kaul, in a recent Diary entry, explained how digital transactions have fallen since December 2016...and why Indians are going back to cash after the demonetisation exercise.

We don't know how this will all play out. The move towards a cashless society could be a positive development for India. It will lower costs, improve transaction transparency, save time, and open up opportunities for some companies. However, we must pause to consider the other side of the coin...and be ready to deal with challenges.

In other news, the stellar debut of Avenue Supermarts (DMart) on Indian indices is talk of the town. Shares listed on the BSE at Rs 604.40, marking a 102% premium the issue price of Rs 299.

The IPO, the biggest since PNB Housing Finance's Rs 30 billion offer in October last year, was subscribed more than 104 times earlier this month. But do IPOs deserve the hype they get? We don't think so.

We recently studied the performance of stocks with an issue size of Rs 500 crore or more listed between 2010 and 2016. Of the 31 IPOs during that time, just ten generated positive returns a year after listing. This is extremely poor. If you'd invested in each of these IPOs on the day they listed and exited in a year's time, your return would have been -16%.

Rohan Pinto, research analyst, recently released the Equitymaster IPO note on DMart. In this detailed report, Rohan not only evaluated the company's business performance, but answered the crucial question about valuations. Find the entire report here (requires subscription).

On the macroeconomic front, the Union Cabinet approved four items of legislation required to implement the goods and services tax (GST). This paves the way for the introduction of these bills in Parliament this week.

The four GST related bills are:

  • The Central Goods and Services Tax Bill 2017 (The CGST Bill)
  • The Integrated Goods and Services Tax Bill 2017 (The IGST Bill)
  • The Union Territory Goods and Services Tax Bill 2017 (The UTGST Bill)
  • The Goods and Services Tax (Compensation to the States) Bill 2017 (The Compensation Bill).

These bills are likely to be introduced as 'Money Bill', thereby ensuring they do not get stalled in the Rajya Sabha.

The above developments have set the stage to finally implement the landmark tax reform by 1 July 2017.

For a detailed view on GST, read Vivek Kaul's report, GST & You: What the Media DID NOT TELL YOU about the GST.

Nifty 50 Index Ends in the Red

The Nifty 50 Index traded on a negative note during the week. On Monday, it opened the session higher but could not sustain up for long and slipped to close the session 33 points down. The selling pressure continued with the index opening gap down on Wednesday taking cues from global markets. Towards the end of the week, the index bounced strongly after taking support at 9,000 level. But finally, it closed its weekly session with a 0.57% loss. The 8,950-9,000 level remains a strong support zone for the index.


Gold Hits Two-Week High

Gold traded on a positive note during the week. On Monday, it opened the session higher but couldn't sustain and closed the session negative. But the selling pressure was temporary. Gold then witnessed some buying interest and traded up during the remaining days of the week. It rose as the dollar slipped to a five-week low. Finally, on Friday, it ended its weekly session with 1% gains.

Gold Ends on a Positive Note

Silver Follows Lead from Gold

Silver too traded on a positive note during the week. Like gold, it opened its session higher on Monday and slipped to close the session negative. The selling pressure temporary as the white metal witnessed buying interest throughout the rest of the week. The buying was seen due to strong trends in global markets. On Friday, the buying interest continued and the commodity closed its weekly session up 1.52%.

Crude Trades on a Negative Note

Crude oil traded in a downtrend during the week. On Monday, it opened the session down and continued to trade lower throughout the week. Despite the OPEC effort to cut output, crude oil fell as rising crude stocks in the US increased the global oil supply. Finally, on Friday, the crude continued to trade on negative note and ended its weekly session with 3.17% loss.

Crude Oil Witnesses Selling Pressure

Natural Gas Witnesses Buying Interest

Natural gas traded in an uptrend during the week. On Monday, the commodity opened its weekly session lower but the selling didn't last long, and natural gas traded up until the next day's close to reach a five-week high. The buying was seen on back of cooler weather forecasts. The commodity witnesses some profit booking midweek after data showed supplies in storage in the US fell. Natural gas continued its uptrend on Friday to close its weekly session with 3.62% gains.


Dollar Hits Four-Month Low

The dollar traded on a volatile note during the week. It opened its session lower on Monday and continued to trade negatively until Tuesday close to hit a four-month low. It fell on back of worries that the Fed will not accelerate the pace of rate hikes. On Wednesday, the dollar opened gap up and traded positive towards the end of the week on strong dollar demand from importers and banks. Finally, on Friday, the currency continued it downtrend and ended the weekly session with marginal loss of 0.24%.

Marginal Loss for Dollar

Euro Ends in the Green

The euro traded on a positive note during the week. It opened the weekly session lower, but the selling interest did not last for long. The currency witnessed some buying interest midweek on French election news. Finally, on Friday, the currency gave up some of its gains and ended its weekly session with 0.27% gains.

Pound Trades on a Positive Note

The pound traded on a positive note during the week. It opened the weekly session up and continued to trade in an uptrend throughout the week. The buying was seen on expectations that the Bank of England will raise rates after positive inflation data. On Friday, the pound witnessed some profit booking against the rupee and ended the week with 0.77% gains.

Yen Witnesses Buying Interest

The yen traded on a strong note during the week. On Monday, it opened the session higher and traded positively throughout the week. The buying came on the back strong Japanese trade surplus data. Finally, on Friday, the yen witnessed some selling but ended the weekly session up 1.57% against the rupee.

Commodities 17th Mar 24th Mar % Change
Gold/10 gms 28,509 28,793 1.00%
Silver/kg 40,909 41,530 1.52%
Crude Oil/barrel 3,245 3,142 -3.17%
Natural Gas/mmBtu 193.30 200.30 3.62%
Currencies 17th Mar 24th Mar % Change
USD / INR 65.57 65.41 -0.24%
EUR / INR 70.50 70.69 0.27%
GBP / INR 81.10 81.73 0.77%
JPY / INR 57.99 58.90 1.57%

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