Most high frequency indicators suggest healthy growth momentum. IIP growth continue to show decent traction with headline April IIP rising marginally to 4.9% y-y (4.6 % y-y in Mar), with 3 month growth average at 5.4%. In segments wise breakdown, we witnessed healthy growth in capital goods and consumer goods. Manufacturing growth remained healthy at 5.2% y-y. June PMI data was positive with composite PMI rising to the highest levels since demonetization at 53.30. Manufacturing PMI came at highest since December 2017, extending expansion period to 11 months. PMI services was at 12 month high. PMI survey indicates that demand condition was positive and output growth was reported across market groups with international markets orders rising at strongest pace since February. Railway traffic continues to post decent growth while cargo growth declined from high numbers. Growth in steel consumption continues to remain strong. Fuel consumption has witnessed some moderation while passenger vehicle sales have stabilized around long term median levels even as two wheeler and commercial vehicle sales continued to grow at a rapid pace. Credit growth also continues to inch upwards but is being largely driven by services and personal loans. Bank credit to NBFC sector is growing strongly. Agri loans remain flat while industrial growth continues to remain dismal. (Source: CEIC)
Inflation came at 5%, which was a positive surprise to the markets. This was over 1.44% base for last year print and also was lower than what analysts have speculated for quite some time. Most of the surprise was in food inflation as the seasonal rise there was lower than what we have seen previously. However in core inflation also we didn’t see any deterioration, which meant that after the sharp spike at start of the year we have seen relatively stable reading since adjusted for base effects and HRA effects. RBI forecast of inflation was more benign than expected as they are baking in less impact of MSP than the street. Going ahead we could see more benign reading in core inflation due to both fading away of HRA impact and favourable base effects. Food inflation is more of a worry now as sowing has lagged a bit though has caught up in last week or so. However it remains an important monitor able going ahead. (Source: RBI, MOSPI)
June trade deficit rose further to US$16.6 bn, up from US$14.6 bn in May, which is the highest level since May 2013. The uptick was both due to continuous uptick in oil imports, and rise in non-oil, non-gold imports. On a y-y basis, exports and imports growth came at healthy 17.6% y-y, and 21.3% y-y, respectively. INR continued to hover near all-time lows to USD, but failed to decisively break above 69. RBI regularly innerved in fx market to defend INR, although the pace of intervention declined in the month as FII flows turned marginally positive after heavy outflows in last 3 months. Notably, total FX reserves (spots and forwards) have declined by ~30bn USD in the last three months to June. (Source: CEIC)
Chinese currency, Renminbi, declined by more than 3% for the second consecutive month in the wake of rising trade tensions with US. US import tariffs on Chinese goods worth USD34bn took effect on 6th July along with the retaliatory Chinese import tariffs. Trade tension between US and China is showing no sign of abatement and remains a key risk to watch out for. BoJ policy was more dovish than what a section of market feared. Yield curve control around 0% would continue, but with some flexibility to move in both directions. However, inflation forecast has been lowered downwards once again. Global portfolio flows to EM bonds turned positive in July after persistent outflows in 10 of the previous 11 weeks. The reversal in flows to EMs is notable since it happened despite slide in Chinese Renminbi. There was also a narrowing of spread between EM Hard Currency bond yield and UST to 352 from a spread of 388 witnessed during the beginning of July. US employment and inflation data remained fairly healthy, despite marginal miss compared to expectations. Markets continue to price for two additional hikes in 2018 and US government yield curve some witnessed steepening during the month of July with 5s30s widening to 26bps from ~21bps during the beginning of the month. Crude remained soft from ~USD78/bbl to ~USD 74/bbl during the month due to higher supply response from OPEC, increasing supply from Libya and escalating US-China trade tensions.
This month we finally saw rally across curves as Govt securities rallied by 10-15 bps and AAA corporate bond rallied by 15-20 bps during the month. Lower crude prices during the month in conjunction with broad macro-economic stability were the primary reason for the same. RBI’s rate hike at the start of new month failed to dampen the enthusiasm as it was more than expected by markets and in fact we saw a small rally post RBI hike as policy statement were taken as less hawkish than expected. In recent months we have seen a weakness in commodity prices along with crude prices also coming off from the highs. The market as of now is not displaying any clear structural trends both locally and globally and in such a situation technical factors like positioning, expectations of OMO purchase from RBI and small movements in global commodity prices takes precedence. We have therefore constructed a portfolio, which is overweight liquid Govt securities keeping in mind the above highlighted factors. We remain vigilant on our portfolio while being actively positioned to take advantage of any opportunity across the curves.
USD: United States Dollar; RBI: Reserve Bank of India; CAD: Current Account Deficit; EM: Emerging Markets; IIP: Index of Industrial Production; PBoC: People’s bank of China;
PMI: Purchasing Managers’ Index’; PSU: Public Sector Undertaking; UST: US treasury
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