Market outlook for this week (February 19 to February 23)

19 Feb 2024 , 09:29 AM

INFLATION AND IIP GOOD; TRADE DATA BETTER

During the week, the MOSPI reported the CPI inflation for January 2024 and the IIP for December 2023. The index of industrial production, is always presented with a lag of one month. The inflation number was 60 bps lower than the previous month while the IIP was over 100 bps higher than the previous month. In short, there was revival in industrial growth, led by manufacturing IIP; and this happened at much lower levels of inflation. But there was more good news on the trade front, especially for the current account deficit.

The merchandise trade deficit was expected to spike in January 2024 due to the direct impact of the Red Sea crisis. However, the trade deficit on the merchandise account was actually lower compared to the previous month. To be fair, exports were lower, but the imports fell sharply, resulting in a lower trade deficit. However, the bigger kicker for the month came from the higher than expected services trade surplus. The bounce in the services surplus ensured that the overall trade deficit was almost neutral with the services trade surplus almost offsetting the entire merchandise trade deficit.

THEMATIC STORIES FOR STOCK MARKETS IN FY24

For those who have been observing markets in FY24, what would be the two big themes you would randomly pick as top performers. It is very likely you would pick Defence and PSU. If you did that, you would be bang on target. Both these themes more than doubled, giving over 100% returns in the first 10 months of FY24. The reasons are not far to seek. Defence company orders books are overflowing due to the government farming out orders locally. Central public sector enterprises (CPSEs) have performed exceptionally well after the government decided that nurturing profitably PSUs is a better strategy than divesting them.

But there were also other themes that gave returns in the vicinity in the region of 70% in the first 10 months of FY24. The first was companies that impacted mobility. This not only includes automobiles and auto infrastructure companies, but also includes companies like Zomato which impact mobility in a big way. Logistics, with its rising importance in the success of “Make in India,” has been another sector that has seen a slew of stars emerging. One generic market theme has been momentum. After all, when there are so many growth stories in the market, who would really care about deep value, margin of safety etc?

INFLATION, GROWTH, AND TRADE SET THE TONE LAST WEEK

It was a data heavy week with most of the domestic and global macros data coming out. Here are the 6 key data points that influenced FPI action in the week to February 16, 2024.

1. Consumer inflation for January 2024 was not only lower than December 2023, but also much lower than the street expectations. At 5.10% CPI inflation, it is a good 60 bps lower than the previous month, although we are still about 110 bps away from the eventual RBI target of 4% inflation. However, it was the composition of the fall in inflation that was more exciting for the markets. On the one hand, fuel inflation was up, but that was expected amidst firm crude oil prices in the global market. However, the lower headline inflation reading was triggered by a sharp fall in food inflation, coupled with a fall in core inflation. That is good news. Fall in food inflation indicate that the economy is getting over the lag effect of weak Kharif as the Rabi output hits the mandis. It also means that the structural inflation is now much lower at 3.6%. To support the argument of lower prices, even the wholesale inflation measured by WPI, fell from 0.73% to 0.27% in January 2024. This may not lead to the RBI cutting rates, which looks more likely in the second half of 2024. However, inflation expectations should taper!

    

2. If the price index was lower in January 2024, the industrial output for the latest month was higher on a relative basis. The composition of the improved IIP is also fairly interesting. Normally, the manufacturing IIP has been the lag factor while mining and electricity have been the lure factors. For a change, January saw a sharp spike in manufacturing IIP, while the mining IIP and the electricity IIP trended lower. Obviously, manufacturing IIP with its 77.6% weightage in the IIP basket, had an oversized impact on the final IIP figure as it ended more than 100 bps higher. More importantly, IIP is an important lead indicator for GDP, to be announced later in February 2024. 

    

3. Apart from the India inflation, the week also saw the US Bureau of Labour Statistics (BLS) announce the CPI inflation for the US economy. Headline US inflation for January 2024 was lower at 3.1%, compared to 3.4% in December 2023. However, what was actually disappointing was that this was higher than the street estimates of 2.9%. That was because, food inflation tapered by just 10 bps and core inflation remained stationary over the previous month. Post the US consumer inflation announcement, the US markets sold off and the next day saw heavy FPI selling in Indian equities. Higher than expected consumer inflation in the US opens up the possibility that the Fed may put off rate cuts for a longer period. As of now, Fed has just ruled out rate cuts in March, but post this data point, they may choose to officially put off rate cuts further.

    

4. The biggest positive data flow for the markets in this week was the January 2024 trade data. The merchandise trade deficit came in sharply lower at $17.49 Billion, due to a marginal fall in exports but a sharper fall in imports. It can be said that the Red Sea crisis does not appear to have impacted the trade volumes for January 2024. However, what really flattered the street was the services trade surplus of $16.75 Billion. Remember, the services trade data is presented by the RBI with a lag of 1 month, but the Directorate General of Commercial Trade & Statistics (DGCIS) updates with latest month projections. This leaves the overall combined deficit at just $0.74 Billion for January 2024 and that is positive for the level of current account deficit (CAD) for Q3FY24 and for FY24. For now, it looks like the full year current account deficit (CAD) for FY24 would be pegged comfortably at below 1.2% to 1.3% of GDP. That would be favourable for the value of Indian Rupee and also for the sovereign rating opinion on India.

    

5. Oil prices again edged higher to $83.5/bbl in the latest week, after a sharp rally in the previous week. Oil was already under pressure after the ceasefire talks between Israel and the Hamas had failed. It now looks like the Israel would take up an all-out assault on the Rafah region of Palestine. As casualties mount, the theatre of war could spread to the Arab peninsula too. Already, ships are taking the Horn of Africa route to avoid the risk of Houthi attacks. That means; longer delivery times, higher freight costs and steeper insurance premiums. That could impact India’s oil economics.

    

6. Finally, the week saw FPI net selling to the tune of $84 million in equities, but the inflows into debt ensured that the net FPI position stays positive in 2024. In the latest week, FPIs were net buyers for 4 days and net sellers only the day after US inflation disappointed. Recent FPI reports indicate that the deluge of FPI flows should commence once there is more clarity on the outcome of the general elections.

The coming week will see two important sets of minute; viz., the minutes announced by the US Fed and the RBI MPC. Both will be out on Thursday and will set the tone for the week.

STOCK MARKET TRIGGERS FOR COMING WEEK TO FEBRUARY 23, 2024

Here are key factors that will have a bearing on stock markets for the coming trading week from February 19, 2024 to February 23, 2024.

• The previous week saw large cap indices outperforming the small and mid-cap indices due to the macro preference for the safety of large cap stocks. For the week, Nifty and Sensex closed with gains of +1.20%, while the Nifty Next-50 closed +2.01% higher. Apart from FMCG sector, all the other sectors were decisively in the positive. However, Mid-cap index ended flat with gains of just +0.20%, while small cap index closed -0.46% lower. Clearly, alpha hunting was not the flavour of the week and that trend is likely to continue in the coming week too. 

   

• With the results season done and dusted, the action shifts to the key dividend record dates slated for the coming week. Some major companies with dividend record dates in the coming week include; Apollo Hospitals, HAL, Coal India, PFC, SAIL, Cummins India, Hero Moto, LIC, MRF, NHPC, Bosch, and Sun TV.

   

• The US FOMC (Fed) minutes will be published on Thursday. Remember, the Fed has already ruled out any rate cuts in March, but markets are still hoping for rate cuts in May or June this year. The markets will be looking at the Fed minutes for critical cues on rate cut timetable for FY24, now that the CME Fedwatch has veered to the Fed viewpoint.

   

• Another key data point will be the minutes of the Monetary Policy Committee (MPC) of the RBI, which will also be published on Thursday. While RBI has not spoken about rate cuts, and it is unlikely in the first half of 2024, markets would be more interested in the timing of the change in RBI stance. Also, with the RBI policy paper talking about the gap between loan growth and deposit growth, that data will be watched on Friday. Currently, the loan growth is nearly 700 bps higher than the deposit growth.

   

• FPIs net sell $84 million in latest week, but buyers the positive cue is that there were net buyers in 4 out of 5 days this week. It is now expected that, unless the RBI minutes or the Fed minutes are really disappointing, the coming week should see positive flows from the foreign portfolio investors. However, oil is likely to remain a pain point, with Brent crude already at $83.47/bbl. Apart from the aggravation in the Red Sea tensions, even the current demand and supply factors favour higher crude prices.

   

• On the IPO front, this week the IPO mainboard will see the IPOs of Juniper Hotels and GPT health opening for subscription, while Juniper Hotels will also close in the current week. In addition, the IPO of Vibhor Steel Products will also list in the coming week. Needless to say, the action on the SME IPO front will continue to be robust.

   

• Finally for some key global data points. In the US, the focus will be on FOMC minutes, API inventories, initial jobless claims, PMI Flash, existing home sales, and MBA Mortgage Applications. In ROW markets, the data focus will be on the Current Account, construction Orders, PMI, CPI, ECB meet in the EU region. In Japan, the data focus would be on the trade balance, machinery orders, and the PMI Flash.

What do these triggers really mean for the market trajectory next week?

NIFTY AND SENSEX COULD SCALE NEW HIGHS IN COMING WEEK

Nifty has first support at 21,950 levels and next support at 21,500, with resistance placed at the previous high of 22,126 levels. For the Sensex, the first support will be at 72,000 levels and the next support at 70,000 levels, with resistance placed at the previous lifetime closing high of 73,328. With VIX at over 15 high volatility is still a risk. The big challenge to watch out for is the VIX levels, which is likely to get increasingly volatile as we approach elections. For now, the big question is whether the Nifty and the Sensex can scale new highs in the coming week. The Nifty is about 100 points away from its peak while the Sensex is about 900 points away. That is not too much to traverse in a week, but it will still depend on how the central bank minutes pan out next week.