Inflation - Still a Major Concern for Fed and ECB

The Federal Reserve sent a strong signal this week that it will raise interest rates this month and soon begin shedding some of its US$4.5 trillion bond holdings - a move that could hurt emerging markets. But is the Fed really ready to rise the interest rates? Let's see what the data suggest.

US consumer spending increased 0.4% in April from a 0.3% rise in March as household spending on goods and services increased. The spending is boosted by a tightening labour market, which is gradually pushing up wages. The consumer confidence index slipped to 117.9 in May from 119.4 in April.

US factory activity edged up in May to 54.9 from 54.8 in April. It hit a high of 57.7 in February but slowed for next two months before ticking up in May.

US private pay rolls surged by 253,000 jobs in May from 174,000 jobs in April, beating expectations.

The US Labor Department said initial claims for state unemployment benefits jumped 13,000 to 248,000 for the week ended 27 May. This was the 117th straight week that claims were below 300,000, a threshold associated with a healthy labour market.

US construction spending dropped 1.4% in April from a 1.1% rise in March. Private construction spending fell 0.7% in April after increasing for six straight months. Public construction spending tumbled 3.7% in April, the biggest drop since July 2016.

US small business borrowing dropped to a six-month low in April. The index measuring US small business borrowing fell to 123.1 in April, down 5% YoY. This was the third straight month of declines and the lowest level since October 2016. Small companies are having trouble paying off old loans. The share of loans more than thirty days past due was 1.7% in April, the highest rate in more than four years. Falling investment and rising loans do not bode well for the companies.

US pending home sales fell for second straight month in April. The pending home sales index dropped 1.3% to 109.8. In fact, there was a drop in home building and sales in both new and previously owned homes. So there is some weakening in a number of home sale measures.

US Midwest factory activity fell more than forecasted in May. The Chicago Purchasing Management Index (PMI) or Chicago Business Barometer fell to 55.2 in May from 58.3 in April.

The Fed policymakers suggest that the US economy is healthy and the central bank should continue to edge towards a more normal footing. Although the labour market and consumer might warrant a rate hike, the other data does not.

Most importantly, inflation has been below the Fed's 2% target, which should be concerning the Fed more than anything. Core PCE, the Fed's preferred inflation measure, rose 1.6% YoY in March. This could delay the additional two rate hikes planned for this year.

Moving on to Europe....

The EU also released data this week. Manufacturing across the eurozone grew at the fastest pace in more than six years in May. The manufacturing PMI rose to 57 in May from 56.7 in April.

The labour market strengthened with the unemployment rate dropping from 9.5% to 9.3% in April to an eight-year low.

Corporate lending grew 2.4% in April, up from 2.3% the previous month to the highest rate since mid-2009.

However, inflation rose just 1.4% from a year ago in May, compared with 1.9% in April. This is well below the ECB's 2% target.

Although the outlook for the eurozone has improved, the risk is not gone yet. Inflation remains subdued and still requires substantial stimulus, as ECB President Mario Draghi said in a speech during an event at Bank of Spain headquarters in Madrid.

The eurozone is still a mess. Don't expect the bond purchasing program and easy money to end anytime soon.

Indian Stock Markets Trade at All-Time Highs

Indian share markets continued their momentum and reached a record high during this week. The BSE Sensex was up 0.79% for the week, while the NSE Nifty was up 0.61%.

FMCG (+2.83%), healthcare (+2.09%), and auto (+2.02%) were the biggest gainers for the week. Metals (-2.79%), oil & gas (-1.66%), energy (-1.40%), and IT (-1.38%) were the top losers for the week.

As per data released by the Central Statistics Office (CSO), gross domestic product (GDP) in the January-March quarter grew at the slowest pace in at least four quarters at 6.1% as against a 7% growth in October-December.

The GDP growth was dragged down by construction, manufacturing, and trade services thereby stripping the country of its status as the world's fastest-growing major economy. Annual economic growth at 6.1% was lower than China's growth of 6.9% for the first three months of 2017.

The expansion was much slower than the 6.5-7.8% forecast by analysts, and below the provisional 7% growth reported in the previous quarter.

During the reporting quarter, the agriculture, forestry, and fishing sectors grew at 5.2%; mining and quarrying at 6.4%; manufacturing at 5.3%; electricity, gas, water supply and other utility services at 6.1%; trade, hotels, transport and communication at 6.5%.

Financial, real estate, and professional services grew over at 2%; and public administration, defence, and other services at 17%. The construction sector shrank 3.7%.

Surely, the lower-than-anticipated fourth quarter GDP number reflects the lingering impact of demonetisation, as predicted by economists. They believe that the sharp expansion in government consumption expenditures in January-March has in fact bolstered GDP growth from an even sharper slowdown.

India is on a high. And our reference is not just to the Sensex. But is all really well? Our macro guru, Vivek Kaul, does not think so.

In fact, Vivek has unearthed underlying trends that he believes could trigger of a series of crisis which could have a big impact on all of us. Click here to find out more.

While we have serious reservations about India's GDP numbers, we have no doubt that India is doing much better than other emerging economies. As per an article in Livemint, apart from China and India, the rest of the emerging economies have not done very well.

India's share of world GDP has grown from 3.9% to 7.2% over the last twenty years. That's just a 3.3 percentage point increase.

Just this one statistic tells us how much India needs to grow if we are to catch up with China. But there's a strong argument that we may never catch up with China. However, we are confident that even if we don't match China, there will be many opportunities to create wealth in the Indian markets.

In news from India's manufacturing sector, the sector stayed in expansion mode in May, charting a rebound from the notebandi-induced downturn.

Indian manufacturing activity expanded for a fourth consecutive month in April, however at a slower pace. Manufacturing sector growth moderated to a three-month low in May amid a softer rise in new orders, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit.

The PMI is the reading of the country's manufacturing sector output and is updated monthly. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

Having deteriorated in December for the first time in one year, the health of India's manufacturing economy showed signs of improvement in January 2017.

The manufacturing PMI charted its recovery from 49.6 in December 2016, to 52.5 in March, registering the fastest upward move since October 2016. At 52.5 in April, the PMI was unchanged from the previous month. In May, however, PMI growth slowed to 51.7, still signifying expansion, albeit at a slower pace.

During May, there was 'softer expansion' of both new orders and production. Incoming new work rose at the weakest pace since February, with slowdowns evident in the consumer and intermediate goods categories, while capital goods producers recorded a contraction in their order books.

The survey added that below par manufacturing growth, and muted inflation could prompt the RBI to move towards an accommodative stance to support growth in the economy.

Looking ahead, production volumes are likely to rise further as businesses will seek to replenish their stocks, and look for acquisitions as remonetisation nears completion.

Nifty 50 Index at New Life High

The Nifty 50 Index ended another week at an all-time high.

The index opened the weekly session lower but recovered immediately and continued trading higher throughout the week to hit a new life high on almost a daily basis. On Friday, the index opened 41 points gap up and traded thinly to end the weekly session with 0.61% gains.

Since the December 2016 low, the Nifty has been trading in a smooth uptrend finding support from the 20-day exponential moving average (EMA) on every correction.

With every successive higher high in the index, the RSI indicator has been making lower highs, thus forming a negative divergence. But on every minor correction, the indicator is finding support from the 50 level.

As long as the index stays above the 20 EMA and the RSI above 50, bulls are in control. But any major drop below these levels and the bulls will have to take a back seat.


Gold Trades on a Volatile Note

Gold traded on a volatile note during the week. On Monday, it opened the session lower but recovered to close the session positive. But the buying could not sustain. Gold then witnessed some selling and traded in a downtrend during the remaining days of the week. It fell on Fed rate hike concerns. Finally, on Friday, it recovered to end its weekly session marginally down with 0.06% loss.

Gold Ends in the Red

Silver Follows Lead from Gold

Silver too traded on a volatile note during the week. It opened its session slight higher Monday and closed the session positive. Like gold, the buying was temporary as the white metal witnessed selling pressure throughout the rest of the week. The selling was seen due to weak trends in overseas markets. On Friday, the commodity recovered and closed its weekly session up 0.46%.

Crude Oil Continues its Downtrend

Crude oil traded in a downtrend during the week. Although it traded positive on Monday, it did not sustain up. Black gold witnessed selling pressure until midweek. It recovered a bit on Thursday, but the downtrend continued on the last trading day of the week. Crude oil fell on rising output from Libya, which added to concerns about increasing US production. The commodity ended its weekly session with 4.11% loss.

Crude Oil Witnesses Selling Pressure

Natural Gas Plunges 10% for the Week

Natural gas witnesses selling pressure during the week. On Monday, the commodity opened its weekly session a bit higher but it slipped sharply to end the session negative. The selling was seen throughout the week on back of larger than expected inventory rise. Natural gas continued its down move on Friday as well to close its weekly session with 9.57% loss.


Dollar Trades on a Volatile Note

The dollar traded on a volatile note during the week. It opened its session higher on Monday and continued to trade positively until Tuesday close. It traded positive on sustained demand from banks and importers. On Wednesday, the dollar opened gap down and traded negative towards the end of the week on fresh selling from banks and exporters. Finally, on Friday, the currency continued to trade down and ended the weekly session with loss of 0.09%.

Marginal Loss for Dollar

Euro Ends in the Red

The euro too traded on a volatile note during the week. It opened the weekly session lower and traded negatively until Tuesday close. The selling was seen as ECB President Mario Draghi insisted on continuing accommodative monetary policy. But the selling interest did not last for long as the currency opened gap up on the next day and continued to trade up towards the end of the week. The up move was seen on the back of easing inflation in the eurozone. Finally, on Friday, the currency gave up its gains and ended its weekly session marginally down.

Pound Trades on a Negative Note

The pound traded on a negative note during the week. On Monday, it opened the weekly session up but slipped lower to close the session negative. The currency spurt up on Tuesday but the buying was temporary and as it slipped lower towards the end of the week. The selling was seen as UK election polls suggested Tories could lose majority. On Friday, the pound gave up its gains against the rupee and ended the week with 0.12% loss.

Yen Witnesses Volatility

The yen traded on a volatile note during the week. On Monday, it opened the session lower and traded down to end the session negative. But the selling didn't not last for long and the currency witnessed some buying interest until midweek. But the buying also faded and the currency slipped sharply towards the end of the week. The volatility was seen on back of mixed data from Japan. Finally, on Friday, the yen witnesses some selling pressure to end the weekly session down 0.55%.

Commodities 26th May 02nd June % Change
Gold/10 gms 28,888 28,871 -0.06%
Silver/kg 40,091 40,274 0.46%
Crude Oil/barrel 3,213 3,081 -4.11%
Natural Gas/mmBtu 214.20 193.70 -9.57%
Currencies 26th May 02nd June % Change
USD / INR 64.70 64.64 -0.09%
EUR / INR 72.63 72.59 -0.06%
GBP / INR 83.25 83.16 -0.12%
JPY / INR 58.38 58.05 -0.55%

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