Market outlook for this week (March 04 to March 08)

20 Mar 2024 , 11:58 PM

ARE THERE RISKS TO THE CURRENT ECONOMIC CYCLE?

As we look at the economic cycles across the US and India, it just appears too good to be true. Rates were cut to boost post-pandemic demand, but this created a situation wherein the supply could not keep pace with demand. The result was runaway inflation and the central banks hiked rates to contain inflation. The surprising part of the story is that the inflation fell in response to rising rates, without impacting GDP growth. While that appears to be too good to be true, there are some distinct risks to the economic cycle that one cannot ignore. This is true for the US and also for India. 

• The first and the biggest risk pertains to the fact that consumer spending could be even more resilient than expected by the markets. There has been enough evidence of this paradigm in the last couple of years when consumption has stayed robust despite sharply higher interest rates. This could possibly slow the progress towards the inflation target (inflation target is 2% in the US and 4% in India). The big risk is that if there is surplus liquidity sloshing around in the system, inflation control will fall short.

   

• The second risk in the current economic cycle is that employment could weaken as the factors supporting economic growth fade. Today, the jobs situation is comfortable, but things could change drastically if the consumption starts to fall rapidly. In that case, we could see a rapid spike in unemployment, which could complicate policy decisions.

   

• Even the geopolitical risks have been elevated for some time. The Russian war in Ukraine is going from bad to worse. The Chinese Navy continues to indulge in sabre rattling in the South China Sea. Not to forget, there have been consistent attacks on ships in the Red Sea by Houthi Rebels. Also, the ongoing war between Israel and the Hamas is likely to create global larger ruptures in the Arab Peninsula, with global repercussions.

Having said that, the current cycle is unique in that it has shown tremendous resilience in terms of jobs and consumption. That has ensured that economic growth sustains, but going ahead, it could also mean that inflation may be tougher to rein in. 

WEEK THAT WAS; THE GOOD, THE BAD AND THE UGLY

It was an action packed week several important announcements made at the local and the global level. Here are the 8 major news items that shaped the week ended March 01, 2024.

1. The big data flow was the third quarter GDP announcement in India. The MOSPI announced the GDP growth at 8.4%, which is much higher than the most optimistic of expectations. The farm sector may have lagged in the quarter but it was more than made by the bounce in manufacturing and mining. However, the pace of growth in some of the contact intensive sectors like trade, finance and hotels and slowed compared to previous readings. Now the bigger news. The positive surprise was not only in the quarterly GDP but also in the peg for full year GDP at 7.6%. That is a good 60 bps higher than the RBI estimates. However, even that may be too conservative as it is factoring fourth quarter GDP growth of just 5.9%. That means, full year GDP may be closer to 8%, assuming the current momentum in growth sustains. It looks like the happy days for economic growth are back all over again.

    

2. During the week, the DIPP also announced the core sector update for January 2024. Now, the core sector represents the growth in output of the 8 key infrastructure sectors which include; coal, electricity, crude oil, refinery products natural gas, fertilizers, cement, and steel. They are a direct outcome of the capex thrust of the government and have strong externalities in terms of the multiplier effect on growth. The core sector growth came in at 3.6% for January 2024. Despite the government going slow on spending, there are two things of note here. Firstly, the base was elevated, so the lower core sector growth might be just temporary. Also, the December 2003 data saw upward revision of 106 bps in the core sector reading, which gives hope for January 2024 also. 

    

3. The fiscal deficit update for January 2024, came in at 63.6% of the full year fiscal deficit target; which is sharply lower than the corresponding period of last year. Even assuming that the last 2 months tend to be high on fiscal deficit limit utilization, Indian fiscal deficit for FY24 would still be able to settle below the 5.8% of GDP target for FY24. That will be the perfect setting for the government to be able to restrict to fiscal deficit to 5.1% in FY25 and also beat its glided reduction path to below 4.5% in FY26. 

    

4. FPI flows into equities for the week turned positive at $743 Million, with 70% of the flows coming in on Friday after the bumper GDP data was announced by the Indian government. Clearly FPIs are impressed and we could see more of lag effect in the coming week. Also, the FPI continue to be net buyers in debt, a trend that has persisted since the start of 2024; on the back of inclusion of Indian debt into the JP Morgan global bond index basket. FPIs were net buyers in equities for the second week in a row and have influenced more than $1.1 Billion in just two weeks, which may be a signal of FPI interest in Indian equities turning around; which the GDP story may have underlined.

    

5. The oil prices spiked in the week to $83.55/bbl, after falling in the previous to around $81.50/bbl. The fall in the previous week was largely on account of weak macro performance of the UK economy and the Japanese economy; which officially slipped into recession. This week, the positive GDP numbers coming from the US and the Indian economy boosted the prospects of oil demand. After all, the US and India are still the two economies with the highest demand for oil and are also among the highest importers of crude oil on a daily basis. On the supply side, oil continues to be limited.

    

6. The US second estimate of Q4 GDP data came in 10 bps lower, but still at par the street expectations. At 3.2%, the GDP growth for Q4 in the US was still indicative of a robust economy growing at a rapid pace. The final estimate is awaited towards the end of March along with the full year GDP growth. However, if one goes by the current data flows, it looks like the US could end the year with GDP growth of 2.5% or higher. This is much higher than the what the US policymaker and economists had estimated at the start of the year. For now, the risk of hard landing may be out of the storyline.

    

7. During the week, the US BEA (Bureau of Economic Analysis) also announced the personal consumption expenditure (PCE) based inflation for the month of January 2024. This is normally announced in the last week of the month, as against the consumer inflation that is announced during the middle of every month. The PCE inflation fell by 20 bps to 2.40%, and is now just 40 bps short of the eventual target of 2%. One can argue that services inflation continues to be sticky, but that is a global trend. However, it is still not too clear whether the Fed would really go in and cut rates now or wait for further signals that cutting rates is imperative. They may opt for the latter.

    

8. Finally, the mega merger of the India operations of Reliance and Disney came through during the week. At $8.5 Billion it will create a media behemoth. The deal assumes a lot of significance, especially in the light of the fact that the Zee Sony deal has almost fallen through and may lose the only rationale for its urgency. However, more pertinent is that the merger creates a massive media property with over 75 Million users, 2 robust OTT platforms and more than 100 channels under its belt.

In short, it was a week of robust news flows, but the biggest of them all was the GDP story, which actually promises to redefine the India narrative.

STOCK MARKET TRIGGERS FOR COMING WEEK TO MARCH 08, 2024

Here are some of the key factors that will have a bearing on stock markets for the coming trading week from March 04, 2024 to March 08, 2024.

• The Sensex closed the week with 0.82% gains, Nifty with +0.57%, and the Nifty Next-50 with +0.60% gains. The index story was a rally in banks and autos on the back of the GDP numbers for third quarter; but IT, oil and FMCG still struggled. During the week, the Mid-cap index fell by -0.99% while the small cap index closed -0.72% down, on perceived risks at higher levels of the markets. Apart from valuations and the preference for large caps in volatile markets, the SEBI stricture to small cap funds and mid-cap funds to go slow on flows also had its sentimental impact.

   

• The big news in the coming week will be Jerome Powell’s testimony before the Senate Banking Committee. Along with the half-year monetary policy, Powell will also update on progress of inflation and rate cut timeline. The rate cut timeline is something that continues to be elusive as the Fed continues to remain non-committal.

   

• The week is likely to see the funds flows into large caps over the small and mid-caps. The strong GDP growth data lag effect is likely to benefit large caps in the coming week too. After all, there was just one day for the GDP data surprise to be reflected in the market sentiments and there will be more to come. In addition, the pressure on the mid-caps and small caps may continue due to the SEBI strictures to AMCs.

   

• In terms of data flows, the key focus areas will be the impact of the PMI Services data and auto numbers. PMI manufacturing is already above 60 and PMI Services is expected to follow suit. Auto numbers will be robust, but the one factor that may impact liquidity is that this will be a truncated week with trading shut on Friday.

   

• FPI flows will be closely watched in the coming week with FPIs infusing $743 Million in equities, as debt flows sustain. After 2 consecutive weeks of positive equity flows, this trend may sustain in the coming week also. However, a lot would still depend on the trajectory of oil prices, which remains elevated at $83.55/bbl.

   

• The markets can expect a busy week for the IPO mainboard with several IPOs opening this week including RK Swamy, JG Chemicals, Gopal Snacks and Mukka Proteins. There are also a number of new listings slated, apart from the robust SME segment numbers.

   

• Finally, here are key global data points to watch. In the US, the focus will be on PMI, vehicle sales, factory orders, API stocks, JOLTS, wholesale inventories, trade balance, non-farm payrolls. In ROW markets, the focus will be on HCOB, PPIM , GDP, and Interest rates (EU; PMI, current account, household spending (Japan); PMI, PPM, Inflation (China.

NIFTY AND SENSEX COULD JOURNEY HIGHER

We again have Nifty and Sensex in uncharted territory. Nifty, now, has support at 22,200 and resistance at 22,750 levels. The Sensex has support at 73,000 levels and resistances are placed at 74,500 and 75,000. With VIX at below 15, some buying on dips looks likely. However, VIX is likely to get increasingly volatile as we approach elections. This week, the Nifty and the Sensex touched life time highs and, with robust GDP data, they should journey higher into a new plane. With some of the biggest data points turning positive for India in this week, the only visible risk at this juncture is a likely rally in oil prices. But, amidst a sea of good news, that may not really matter too much.