Central Bank Moves: Skipping, Hopping, and Pivoting - Insights and Market Trends

Dear Readers,

Welcome to our weekly newsletter, where we bring you the latest insights and updates on global central bank actions, economic indicators, and market trends. This week, central bankers made interesting moves, ranging from skipping to hopping, leaving investors and markets curious about the future.

Central banks have been engaged in lively debates about their strategies. Shaktikanta Das of the Reserve Bank of India (RBI) recently skipped for the second time, while Jerome Powell of the Federal Reserve may follow suit next week, although his actions have been unpredictable. In contrast, Bank of Canada Governor Tiff Macklem preferred to hop this week, implementing a small 25 basis point increase. Similarly, the Reserve Bank of Australia's Chief Philip Lowe surprised the markets by executing two small jumps of 25 basis points each, contrary to the expected skip. Meanwhile, the South African central bank's 50 basis point raise last month could be seen as a significant leap, although it pales in comparison to the Argentine central bank's remarkable 10 percentage point hike in April, which resembled a pole-vault.

Central banks not only move up and down but also pause or pivot. While this week's consensus suggested an extended pause, RBI Governor Shaktikanta Das craftily clarified that the pause was only for this meeting. We, on the other hand, described it colourfully as a pivot-killer. Experts such as Gaurav Kapur, Chief Economist at IndusInd Bank, cautioned that prolonged pauses and tight liquidity conditions could intensify pressure on market rates. Barclays' Rahul Bajoria shared in an interview that with strong economic growth, the RBI is unlikely to cut rates anytime soon. It is widely agreed, however, that Das's hiking days are over.

Looking ahead to the Fed's meeting next week, a columnist and market maven Ajay Bagga has offered his insights in an in-depth piece titled "Will the Fed skip, pause, pivot, or skip, hike, pause, pivot?" The markets will undoubtedly dance to the tune set by the Fed.

In terms of the Indian economy, PMI data suggests it is in good shape. The RBI has even revised its forecast for year-on-year real GDP growth for the current quarter from 7.8 percent to 8 percent. The World Bank predicts that India's contribution to global growth this year and the next will match that of the US.

Turning to stocks, we have observed a bounce in the travel and hotels sectors, which is reflected in our weekly tactical pick and a recommendation for VIP Industries.

However, despite positive signs, real sales growth for India Inc has been declining for several quarters. Discretionary spending has not yet returned to pre-pandemic levels, as highlighted in a telling chart. Companies exposed to the external economy, such as Info Edge, have already felt the impact, as discussed in a recent article on the funding winter's effect on startups.

We have engaged in debates about the correlation between the recent market rally and the overall economy, cautioning investors to mind the gap between economic growth and index returns. Furthermore, we present a chart questioning whether the Indian equity market is overvalued.

Amidst all this, it's important not to overlook the insights provided by Gillian Tett's perceptive piece, which sheds light on five critical issues not fully captured by the numbers: technological change, the environment, war, health, and the political economy of business. We have previously emphasized the significance of geopolitics.

 Highlights:

Central Bank Actions: Central bankers worldwide are adopting different strategies, with some skipping, hopping, or pivoting. Shaktikanta Das of the RBI skipped for the second time, while Jerome Powell's actions remain uncertain. Bank of Canada Governor Tiff Macklem opted for a small hop, while the Reserve Bank of Australia's Philip Lowe surprised markets with two small jumps.

Pausing and Pivoting: Central banks not only move up and down but also pause or pivot. The RBI's governor emphasized that the pause was only for the current meeting, while experts cautioned that prolonged pauses and tight liquidity conditions could impact market rates. It is widely agreed that Das's hiking days are over.

Fed's Meeting: The focus now shifts to the Federal Reserve's upcoming meeting, with speculation on whether they will skip, pause, pivot, or hike. A columnist Ajay Bagga provides insights in an in-depth piece, which will influence market movements.

Indian Economy: The Indian economy appears to be in good shape, as indicated by PMI data and the RBI's revised GDP growth forecast. The World Bank predicts India's contribution to global growth to match that of the US.

Stocks: The travel and hotels sectors show signs of bouncing back, reflected in our weekly tactical pick and a recommendation for VIP Industries.

Economic Challenges: Real sales growth for India Inc has been declining, and discretionary spending has not yet recovered to pre-pandemic levels. Companies exposed to the external economy, such as Info Edge, have already faced challenges due to the funding winter.

Market Analysis: We engage in debates about the correlation between the market rally and the overall economy, cautioning investors about the gap between economic growth and index returns. We also question whether the Indian equity market is currently overvalued.

Insights from Gillian Tett: Gillian Tett's perceptive piece highlights five critical issues not fully captured by the numbers: technological change, the environment, war, health, and the political economy of business. We have previously emphasized the significance of geopolitics on economies, businesses, and markets.