Intelligentguess

Situation in May’07

• On a monthly basis Consumer prices rose by 0.61 % (0.65 % in Apr’07)
• On an annual basis Consumer prices rose by  2.69 % p.a ( 2.57 % p.a in Apr’07)

• On a monthly basis Producer prices rose by 1.21 % (0.97 % in Apr’07)
• On an annual basis Producer prices rose by 4.09 % p.a ( 3.17 % p.a in Apr ’07)

• On an annual basis Core Consumer prices rose by  2.20 % p.a ( 2.30 % p.a in Apr’07)
• On an annual basis Core Producer prices rose by  1.58% p.a ( 1.51 % p.a in Apr’07)

Background

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Core CPI viz Fed rate ( click on image for a clearer visual)

The interest rate at 5.25% has helped in bringing down Core CPI.

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CPI viz Core CPI ( click on image for a clearer visual)

The direction of CPI tends to infuence the direction of Core CPI. CPI has been on a growth path since Oct’06. Core could follow.

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PPI viz CPI ( click on image for a clearer visual)

• The Fed has in its statement said that it feels that that inflation has been moderate in the first half of the year. It obviously is looking at core inflation, since normal CPI and PPI have been on a strong rising trend.
• PPI growth looks unlikely to be beyond 4.50% p.a - 5.00% p.a
• However the persistent sharp growth in PPI could drag CPI up towards the 3.5% - 4.00% p.a area

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Conclusion

Unless we see a clear drop in Producer prices, it is very likely that the Fed fears on inflation could once again become “elevated” ( i.e rate hike )

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Related links

USA : No change in Fed rate - concerns remain on inflation

• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04 
• USA - Producers prices remain high in Apr ‘07
• UK - PPI Producer prices drop in Apr’07
• Japan - Producer prices rise in Apr’07

• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• USA - Inflation rate (CPI) drops marginally in Apr’07
• UK Inflation (CPI) drops in Apr’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

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Situation

• The Federal Open Market Committee ( FOMC ) met on June 27th 2007. The FOMC releases a statement after their meeting - reflecting the Interest rate decision and their thinking about the future.
• Statements are standardized so that there is no room for a mis - understanding.
• Comparing statements of the past - to the current statement can give us a clue on how the FOMC thinking is changing and in which direction they are pulling towards.
• Have broken down and then compared the current statement released to the  statement made in the last meeting . Items in Bold  Italics highlight the differences in thinking.
• The next FOMC meeting is on  August 7th 2007.. 

Comments

• The Feds primary concern remains inflation ( though they feel that it has moderated). As such rate changes cannot be expected in the next meeting to be held on August 7th 2007. Any sustained rise in inflation (need to observe inflation data in Jul’07 and Aug’07) could however trigger a rate hike.

• The Fed does not seem have any fears that the current rates could act as an impediment to growth. As such it is not currently considering rate drops. Any change of such a stance would depend on the preliminary GDP data for Q2 2007 ( expected on July 27th 2007). The earliest communication of any change in stance (regarding growth fears)  would therefore happen in the August 7th meet.  

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Related link

USA - Inflation (specially core) faces a rising risk

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As we had predicted, Indian money market rates have retraced to saner levels after hitting ridiculous lows of 0.01% p.a. on a sustained basis for the past couple of weeks.

Overnight rates climbed to levels of 8.25%, higher than the central bank’s repo rate, the rate at which it infuses funds. No wonder the RBI received bids worth more than INR 100 bn under its daily lending facility available at the rate of 7.75%.

Rates are expected to remain firm, as the transfer of the stake in the State Bank of India from the RBI to the Central Government takes place today.

With the US Fed’s rate decision (No change in policy rates; some concerns expressed on inflation) now out of the way, focus of market participants shifts to RBI’s monetary policy review, due on July 24.

Personally, I do not forsee any change in policy rates in India at least for the time being. Things seem to be going the way policymakers would like to have it. Inflation readings are low enough, the relentless appreciation in the Indian rupee seems to have been halted for the time being, credit growth seems to be moderating and banks are now laying greater focus on credit quality.

Under these conditions, the RBI Governor may want to hold his horses for the time being. Of course, we have seen his penchant for surprises in the past. The market would therefore continue to remain wary.

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The Reserve Bank of India has released guidelines, for banks, related to stress testing as part of its focus on improvement in risk management practices.

The relevant notification lists

a) the utility of stress testing,

b) framework requirements, and

c) relevant remedial actions to be taken.

Banks have been advised to put in place appropriate stress test policies and relevant stress test framework for various risk factors by September 30, 2007. Formal stress testing frameworks in accordance with the guidelines are operational from March 31, 2008.

RBI has also released a document (PDF document) which gives illustrative examples of different kinds of stress tests.

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Situation

• On a monthly basis production contracted by -0.45%  ( grew by 2.85% in Mar’07)
• On a yearly basis production has grown by 9.03% p.a ( grew by 10.17 % p.a in Mar’07)

Background

• Production has been on a downward growth trend since May’06 ( 5.64% p.a in May’06 and 3.06% p.a now)
• The ECB raised interest rates to 4.00% on June 6 2007

Conclusion  (click on image for a better visual)

• Orders likely to drop initially towards 4.5.% p.a and then retain a range between 4.50% p.a - 9.50% p.a towards Sept’07
• Growth then likely to drop to a 0% p.a after Sept ‘07 towards Mid ‘08

Related links

• Europe - New Orders grow in Mar’07
• USA - New orders grow for the first time since Sept’06
• Japan - Orders grow marginally in Apr’07
• UK - New Orders decline in Apr’07

• Europe - Production in Apr’07
• USA - Production in May’07 grows at its slowest pace since Sept’05
• UK - Production remains down in Apr’07
• Japan - Production grows at a declining rate in Apr’07
• India - IIP continues to grow in Apr’07

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Ever since overnight money rates in the Indian money markets have crashed, sometimes to as low as 0.01% per annum, analysts have been expecting measures from the Reserve Bank of India to bring it back to normal levels (within the LAF band of 6% - 7.75%). Surprisingly, except for the odd small additional government borrowing (which is managed by the central bank), RBI has maintained complete silence on the issue.

Many analysts have even expected (or called for) another hike in the cash reserve ratio (CRR).

In my view, the central bank would be very wary of using a blunt instrument like an increase in the CRR. It’s ability to conduct open market operations is also limited, since the amount of securities held on its books are generally insufficient to effectively conduct one. And, on the issue of market stabilization bonds (MSS), it is fast approaching the limit it set for itself. It therefore has little choice but to let the liquidity remain within the system.

A consequence of the humongous liquidity, is that this effectively puts a break on the upward bias of the Indian rupee (INR) in the currency market. Personally, I feel that the central bank has allowed the excess liquidity to remain in the system to ensure precisely this. In other words it is focusing on a policy of exchange rate management rather than liquidity (in other words inflation) management, at least for the time being.

The softening of the inflation readings (the last figure came in at 4.28%, well within the comfort zone of the central bank) has also helped them to continue following this policy.

Overnight rates should head back to normalcy, once the stake held by RBI in the State Bank of India is transferred to the Government, before the end of this month. This transaction is worth more than INR 350 bn. Effectively that much money will leave the banking system.

All the more reason why I do not expect a hike in the CRR.

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Situation

• On a monthly basis production had no growth  ( grew by 0.4% in Arp’07)
• On a yearly basis production has grown by 1.60 % p.a ( no change from Apr’07)

Background

New orders have had a bit of growth in Apr’07 ( first time since Sept’06). This could puush production up towards Sept’07

Conclusion ( click on image for a better visual)

• Production could range between 1.90% and 4.2% growth towards Sept’07
• Would expect Production to contract towards -5.0% p.a towards end of 2007 early 2008.

Related links

• USA - Production grows in Mar’07 at the slowest pace since Sept’05
• Europe - Production in Apr’07
• UK - Production remains down in Apr’07
• Japan - Production grows at a declining rate in Apr’07
• India - IIP continues to grow in Apr’07

• USA - New orders grow for the first time since Sept’06
• Europe - New Orders grow in Mar’07
• Japan - Orders grow marginally in Apr’07
• UK - New Orders decline in Apr’07

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Situation

• On a monthly basis prices rose by 0.43 % (0.32 % in Mar’07)
• On an annual basis prices rose by  2.41 % p.a ( 2.82 % p.a in Mar’07)

Background

1. The annual inflation is at its lowest levels since July 2004 ( 2.41 % p.a)
2. The European Commercial Bank (ECB) had raised its interest rates from 3.25% to 3.75%,  in Dec’06 (25 basis ponts), and in Marc’07 (25 basis points).
3. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 bais points to 4.00%.
4. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term.
5. European GDP has been expanding in Q1 2007

Conclusion (click on image for a better visual)

• The recent hike in rates would encourage the PPI to move towards the  2.00% p.a area ( ECB target)
• The strong drop in PPI could also lead to CPI ( specifically Core CPI) dropping. If this does happen - the ECB could take a breather on rate hikes.

Related links

• Europe - Producer Prices : Prices in Mar’07 rise at the lowest pace since Jul’04
• USA - Producers prices remain high in Apr ‘07
• UK - PPI Producer prices drop in Apr’07
• Japan - Producer prices rise in Apr’07

• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• USA - Inflation rate (CPI) drops marginally in Apr’07
• UK Inflation (CPI) drops in Apr’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07 
• India - marginal drop in inflation ( CPI )

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Situation

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Background

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Conclusion (click on image for a better visual) 

• Orders can be expected to range between contraction of -5.0% p.a to a 7.00% p.a growth towards Jul-Sep’07
• A -5.0% p.a to a -14.00% p.a contraction in orders looks likely from Sept 2007 towards Mid 2008
• Production can be expected to remain down in May’07 ( and with 2 months production down , GDP cannot be expected to have strong growth in Q2 2007)

Related links

• USA - New orders grow for the first time since Sept’06
• Europe - New Orders grow in Mar’07
• Japan - Orders grow marginally in Apr’07

• Europe - Production in Apr’07
• UK - Production remains down in Apr’07
• Japan - Production grows at a declining rate in Apr’07
• USA - Production grows in Mar’07 at the slowest pace since Sept’05
• India - IIP continues to grow in Apr’07

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Goods as a % of GDP

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Goods and Services as a % of GDP

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Balance of payments ( BOP) as a % of GDP

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UK - Trade as a % of GDP (click on image for a larger visual)

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USA - Trade as a % of GDP (click on image for a larger visual)

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