US CPI data: How inflation impacts stock market investment

Despite efforts by central banks, inflation is slowly declining but stubbornly high in the majority of significant developed economies, including the UK and the U.S. Consumer Price Inflation (CPI) in the US is currently 6.4%, which is slightly more than anticipated but lower than the 40-year peak of 9.1% in June 2022. According to data released on Wednesday, the UK’s inflation rate decreased for the third consecutive month in January to 10.1%, which was below analysts’ estimates but still five times more than the Bank of England’s objective.

Markets are now betting on higher interest rates for a longer period of time, as they begin to heed the message from central bank officials, including those from the United States Federal Reserve, the Bank of England, and the European Central Bank, that there is still working to be done to cool inflation in the face of robust labour markets and wage growth.

Although the rate of price rise is falling, the prices of goods and services are still increasing by 6.4% as seen in January. The inflationary environment has a direct and indirect impact on stock market investments. “Stubborn inflation affects stock markets because central banks, including the Fed, BoE and ECB, will have to continue to step in and raise interest rates. This means people adjust and rein-in their spending, it cools the economy and companies can struggle to make profits,” says Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations.

“Stock markets are correlated to the profits of the companies within that particular index. In this environment of higher rates for longer than had previously been anticipated, some companies are going to find it difficult to maintain margins and, as we’re now seeing, are failing to report earnings as had been expected. In other words, if costs are going up firms can’t maintain margin, so that company is unlikely to be a good investment until things change,” adds Green.

Friday’s report from the Commerce Department showed that consumer prices rose 0.6% from December to January, up sharply from a 0.2% increase from November to December. On a year-over-year basis, prices rose 5.4%, up from a 5.3% annual increase in December.

Excluding volatile food and energy prices, so-called core inflation rose 0.6% from December, up from a 0.4% rise the previous month. And compared with a year earlier, core inflation was up 4.7% in January, versus a 4.6% year-over-year uptick in December.

 

Daily FII outflow at worst in seven months; can investors expect more pain ahead?

Is there more pain on the cards for Dalal Street bulls? Foreign institutional investors net sold Indian shares worth Rs 5,977.9 crore on Friday — the biggest in a day since June 17, 2022, according to provisional exchange data, though domestic institutional investors continued to support Dalal Street, with net purchases to the tune of Rs 4,252 crore.

As of January 27, FIIs have net offloaded Indian stocks worth Rs 11,354.4 crore in five back-to-back sessions of selling, their second longest and heaviest selling spree of so far in 2023. 

During a 17-session period that ended on January 16, FIIs took out a total of Rs 24,638.1 crore in stocks, according to the data. 

 FIIs have been net sellers to the tune of ₹ 381 billion (bn) since the start of the year?

And this came on the back of ₹ 1,214 trillion (tn) of net sales in the year 2022.

That's right! FIIs are on a selling spree. They are dumping Indian stocks.

In fact, they have been unenthusiastic about India for quite a while now. In the boom year of 2021, FIIs were modest net buyers to the tune of ₹ 257.5 bn.

Mind you, this was for the full year 2021. That works out to just a little over ₹ 2 bn in net buying per month in a raging bull market. It was the Indian retail investor that drove the market higher.

So this means foreigners did not buy in the covid bull market. Then they have been selling relentlessly after the market peaked in 2021. And they have picked up the intensity of selling this year.

Is it any wonder the Indian stock market has been struggling to scale new highs since October 2021?

It's the FIIs' fault.

But why? What are the reasons for this relentless selling?

Well, we can think of four main reasons. Let's examine them one at a time…

• Rising Interest Rates

Central banks all over the world have been increasing interest rates to fight inflation.

During covid, they eased liquidity and cut rates to record low levels (even zero in some cases). This was to ensure that their economies did not freeze up during the lockdowns.

They did not pay attention to the risks of high inflation because during covid, that seemed like a remote possibility.

But things soon changed. You could say, the economic situation flipped 180 degrees. As soon as people started to get back to their regular lives, inflation hit hard.

Central banks are raising interest rates to try and get ahead of inflation before it gets out of hand. They have been at it since. There is no indication that interest rates will come down soon. Thus the stock market has to get used to high interest rates.

This is bad news for emerging markets like India. Whenever, interest rates in developed countries rise, money flows back to these economies as they are perceived to be ‘safer'.

This has been going on since the second half of 2021 and it doesn't look like ending any time soon.

• Depreciating Rupee

When compared to other emerging markets, the rupee has fallen less. But that can't hide the fact that the depreciation of the rupee has been significant.

From 73 to a dollar in September 2021, the rupee fell to 83 in October 2022. That's a decline of 12% in 13 months.

This is a big loss to any foreigner holding Indian assets. If the asset did not rise in value by at least 12% during this time, he would face a loss.

During this period Indian stock markets were falling. Thus FIIs faced a double loss…on the stocks and on the currency.

Thus they have been selling shares in India and other emerging markets and taking the funds back to the US and other developed markets.

• Flight to Safety Due to Fears of a Recession

Almost everyone thinks the US will fall into a recession this year along with the rest of the developed world.

This is a very real possibility. And as they say, when the US sneezes, the world catches a cold. The market thinks if the US is in a recession, there could be a global recession. This fear has been driving markets lower.

• The Reopening of China

China has been a pariah on financial markets ever since covid. We have seen harsh lockdowns, investigations against leading Chinese businessmen, a clampdown on several industries, and a disastrous zero-covid policy.

And this is aside from all the geo-political tensions with Taiwan and the US.

But 2023 could be different. China is reopening for business.

By that we mean pre-covid business as usual. This will give a big boost to its economy. Thus its stock market, beaten down as it is, will look very attractive to foreign investors.

This partly explains why we have seen a recent acceleration in FII selling in India. A part of the funds are going to China along with the US.

This will be a source of pressure on the Indian market in the short term.

 

Bank credit growth rises to 16.5% to Rs 132.81 trillion in Jan 13 fortnight

Deposit growth has gathered pace to 10.6%

After a slight moderation in growth in the previous fortnight, bank credit growth picked up in the fortnight ended January 13, 2023, with 16.5 per cent YoY growth to Rs 132.81 trillion, latest data released by Reserve Bank of India (RBI) showed.

Having said that, in the first fortnight of the calendar year, credit growth contracted 0.2 per cent.

Credit growth moderated to 14.9 per cent YoY in the fortnight ended December 30 due to base effect, as bank credit expanded by 9.2 per cent during the same period last year.

currency in circulation February, 2023

 The value of the currency in circulation (or public holding of cash) stood at ₹ 32.42 lakh crore as on December 23, 2022, according to Reserve Bank data.03-Jan-2023

Currency in Circulation data was reported at 33,245,154.017 INR mn in 10 Feb 2023. This records an increase from the previous number of 32,977,371.317 INR mn for 03 Feb 2023

U.S., benchmark 10-year Treasurys fell to a session low of 3.622%

 In the U.S., benchmark 10-year Treasurys fell to a session low of 3.622%, rose to a session high of 3.759%, then settled flat on the day at 3.7206%. 

U.S. consumer price index (CPI) rose 6.4% in the 12 months through January

 U.S. consumer price index (CPI) rose 6.4% in the 12 months through January – the smallest gain since October 2021. However, CPI increased 0.5% last month after gaining 0.1% in December, in line with expectations.

The question of how long the Fed could continue to raise rates was still potent, as raising rates more than needed could clamp-down on the economy, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Money market traders have priced in at least two more 25 basis point rate hikes this year and see interest rates peaking at 5.2% by July.

Earlier in the day, Euro zone gross domestic product growth slowed in the last three months of 2022 but stayed in positive territory along with a resilient labour market.

 

India’s WPI Inflation Declines To 4.73% In January, Touches 24-Month Low

Wholesale Price Index (WPI) inflation data for January has been released on Tuesday. According to this data, India’s wholesale inflation has fallen again, bringing another relief to a long cycle of rising prices. As per the official updates, the WPI inflation has declined to 4.73 per cent, touching another low vis-a-vis previous figures. This also means that WPI inflation has now touched a 24-month low.

The release of India’s wholesale (WPI) inflation numbers come at a time when the retail inflation data, released on Monday, showed a 3-month high of 6.52 per cent. This also meant that the mentioned number breached the Reserve Bank of India’s (RBI) tolerance level after two months. 

Before this January WPI inflation data was released, in December, India’s wholesale inflation data showed an ease to 4.95 per cent despite global headwinds suggesting a rise in prices. Back then, the WPI inflation numbers also hit a 22-month low, bringing a sigh of relief to many.

 

CPI inflation for January rises to 3-month high at 6.52%

The Consumer Price Index (CPI) or retail inflation for January rose to a three-month high at 6.52 per cent, data released by the Ministry of Statistics & Programme Implementation (MoSPI) showed on 13 January.

Earlier the retail inflation rate eased down to 5.72 per cent in December. It was 5.88 per cent in November, and 6.77 per cent in October 2022.

According to the details, the retail inflation returned to 6 per cent mark after the Reserve Bank of India raised the policy repo rate by 25 basis points to 6.5 percent. The CPI inflation has now been above it for 40 months in a row, when compared with the medium-term target of 4 percent. 

COUNTRIES DEFAULTING ON DEBTS SRILANKA......BANGLADESH.....PAKISTAN......

 COUNTRIES DEFAULTING ON DEBTS SRILANKA......BANGLADESH.....PAKISTAN......THESE COUNTRIES DONT EVEN HAVE MONEY TO BUY CRUDE.....PETROL....DIESEL........

RBI repo rate hiked by 25 bps to 6.50%......10 year GSEC yield is @7.35%

 

RBI repo rate hiked by 25 bps  to 6.50%

On expected lines, RBI settled for a smaller 25 basis points repo rate hike. Experts believe that this could be the last rate hike in the ongoing rate hike cycle. RBI increased the FY23 GDP growth estimate to 7% from 6.8% and expects the retail inflation to be at 5.6% in Q4. 

10 year GSEC yield is @7.35%

 

CPI inflation falls again in December, hits 1-year low of 5.72%

ndia's headline retail inflation rate eased to a one-year low of 5.72 percent in December from 5.88 percent the previous month, data released on January 12 by the ministry of statistics and programme implementation showed.

At 5.72 percent, the latest Consumer Price Index (CPI) inflation print is below the consensus estimate.

The Bank of England raised interest rates a half point to 4%

The Bank of England raised interest rates a half point, saying more increases will be needed if signs of an inflationary spiral persist.

Seven of the UK central bank’s nine-member Monetary Policy Committee endorsed the hike to 4%, while two voted for no change. The majority said strong pay growth and an ongoing shortage of workers were feeding price pressures in the economy.

The European Central Bank raised interest rates for the fifth successive time on Thursday and signalled another half a percentage point increase for March, pressing ahead with policy tightening even as some global peers are slowing down.

Fighting runaway inflation, the ECB has raised its key rate by an unprecedented 3 percentage points in just seven months, in the hope that higher borrowing costs will temper demand and prevent rapid price growth from getting entrenched.