Highlight of the Day
U.S. consumer prices rose by the most in more than 8 years in March as increased vaccinations and massive fiscal stimulus unleashed pent-up demand, kicking off what most economists including Fed Chair Powell expect will be a brief period of higher inflation.
CPI surged 2.6% year-on-year, following a 1.7% increase in February. Base effects are expected to push up annual inflation even higher in the coming months before subsiding later this year.
Core CPI (excluding volatile food and energy components) increased 1.6% on a year-on-year basis after rising 1.3% in February.
Fed tracks the core personal consumption expenditures (PCE) price index for its 2% inflation target, a flexible average. The core PCE price index is at 1.5%.
The U.S. government reported last week that producer prices surged in March. With the CPI and PPI data in hand, economists at JPMorgan forecast the core PCE price index gained 0.4% in March after nudging up 0.1% in February.
But labor market slack could make it harder for inflation to continue spiraling higher. Employment remains 8.4 million below its peak in February 2020. The extremely accommodative fiscal and monetary policy are also unlikely to keep inflation uncomfortably high, if history is a good predictor
“Inflation is a process and not a one-time event,” said Chris Low, chief economist at FHN Financial in New York. “These bottlenecks are one offs. The Fed will not consider action until it views price levels changes as permanent rather than temporary, something it does not consider possible until the economy is at full employment.”
“Customer inventories at record lows and full order books suggests companies have strong pricing power that could allow them to expand profit margins after several years of margin compression, which could keep inflation higher for longer,” said James Knightley, chief international economist at ING”
Market Highlights at 08:00 a.m. I.S.T.
• The MSCI Asia Pacific ex-Japan is trading higher 0.56%, and the MSCI Emerging Market index is up 0.46%
• Indian equity benchmarks to remain closed today on occasion of Dr. Baba Saheb Ambedkar Jayanti
India Markets
India’s equity benchmarks ended more than 1% higher on Tuesday trade after the government moved to fast-track approvals for foreign Covid-19 vaccines, with beaten-down financial stocks leading the gains
The blue-chip NSE Nifty 50 index added 194 points or 1.36% to 14,504 and the benchmark S&P BSE Sensex added 660 points or 1.38% to close at 48,544
Bank Nifty added 979 points or 3.18% to settle at 31,771
Broader markets out-performed headline peers — Midcap 100 index added 1.74%; Smallcap 250 index added 1.68% and Nifty 500 added 1.035%
Nifty P/E for Apr. 12 increased to 32.72 from 32.34 with Nifty P/B edged higher to 4.15 from 4.09, as recorded by NSE India
India VIX or the barometer of nervousness in the market, moved down -11.02% from 22.99 to 20.46 levels
Overnight Call Money rate weighted average stood at 3.15% as per RBI data. It moved in a range of 1.90 — 3.50% for Apr 09
Under Liquidity Operations by RBI, Reverse Repo for the week (Mar 29 to Apr 04) rose above 6 lakh crores (6.13 lakh crores), marking higher surplus liquidity in the market
Yield curve on the benchmark 10-Yr government bond flat at 6.01%, while the rupee extended weakness to 75.2670 per U.S. dollar
Automotive stocks also surged over 4%, with Tata Motors rising 5.7% after sales at its Jaguar Land Rover unit surged
Metal stocks advanced 3.4% after benchmark iron ore prices surged on falling supplies from major miners and strong demand
Investors also watched out for data on the country’s retail inflation for March. Retail price inflation in India edged up to 5.52% in March of 2021, the highest in 4 months from 5.03% in February and above market forecasts of 5.4% mostly due to higher commodity prices and economic recovery. Food inflation accelerated for the second month to 4.94% from 3.87% with the cost of pulses jumping 13.25% and the cost of vegetables felling at a slower 4.83%
India’s fuel consumption rose in March, for the first time in three months, to its highest since December 2019, as economic activity gradually picked up after a coronavirus-induced slowdown. Diesel consumption gained 10% in March from February to 7.22 million tonnes, and also rose 27.6% year-on-year
“The rising COVID cases have been the biggest source of nervousness in the markets, so the speeding up of (vaccine) approval is clearly helpful,” said Anita Gandhi, director at Arihant Capital Markets in Mumbai. “There was also good value in buying after yesterday’s correction.”
America Markets
The Dow Jones Industrial Average wobbled on Tuesday trade as investors tried to gauge the impact of a halt in the rollout of Johnson & Johnson’s Covid-19 vaccines and an uptick in inflation
The broad-based S&P 500 ticked up 13.60 points, or 0.3%, to 4141, setting a record closing high
The Dow Jones Industrial Average, composed mostly of cyclical stocks, inched down 68.13 points, or -0.2%, to 33677, stung by a 1.3% fall in J&J shares
The tech-heavy Nasdaq Composite Index climbed 146.10 points, or 1.1%, to 13996
U.S. equity futures fell slightly in early Wednesday trade. S&P500 futures is down -0.01%; Dow Jones futures is down -0.07% and Nasdaq futures is down -0.05%
Government bonds weakened. 10-Yr U.S. Treasury yields, which move in the opposite direction to bond prices, fell to 1.62% in early Wednesday, after government’s auction of 30-year bonds was greeted with strong demand on Tuesday. Dollar is weak at 91.75 due to high inflation numbers for March
The Cboe Volatility Index, known as Wall Street’s “fear gauge,” fell -1.54% to 16.65 on Tuesday
The annual inflation rate in the U.S. jumped to 2.6% in March of 2021 from 1.7% in February, slightly above market forecasts of 2.5%. It is the highest reading since August of 2018 with main upward pressure coming from energy (13.2% vs 3.7% in February), namely gasoline (22.5% vs 1.6%), electricity (2.5% vs 2.3%) and utility gas service (9.8% vs 6.7%). Cost of apparel continued to fall (-2.5% vs -3.6%)
Although policymakers at the Federal Reserve expect a bump in consumer prices to be short-lived, many traders disagree, with fears of faster CPI playing out across duration-heavy assets from bonds to tech stocks
The NFIB Small Business Optimism Index in the United States increased to 98.2 in March of 2021, the highest in 4 months, from 95.8 in February. The uncertainty index also increased to 81 from 75 which was the lowest since April last year
“While the jump in CPI is pretty significant, the market may take it with a grain of salt, it could already be priced in as the market has been skittish about rates for some time,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial. “The real curveball today is the J&J vaccine halt, although this too may be shrugged off as a minor setback. While this may cause some short-term volatility, investors have been pretty steadfast in their faith in a full economic recovery.”
“A lot of growth and inflation have already been priced into the market,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “It’s almost as if you need to exceed those expectations in order to see a more pronounced reaction from markets.”
Asia-Pacific Markets
Most Asian stocks climbed in early Wednesday trade following gains in U.S. equities and bonds, as investors shrugged off a higher-than-forecast rise in U.S. inflation to focus on the path of the global recovery
Hong Kong, Australia benchmarks rose and tech stocks lifted China, but shares dipped in Japan amid concerns a slow vaccine rollout will crimp activity
Japan’s Nikkei 225dropped -0.34% to 29,649 and Topix 500 dropped -0.27% to 1,518
South Korea’s Kospi added 0.12% to 3,171
In Hong Kong, Hang Seng added 1.17% to 28,835 and Hang Seng China Enterprises added 1.56% to 11,018
In China, CSI 300 added 0.57% to 4,968 and Shanghai Composite added 0.39% to 3,409
Australia’s S&P/ASX 200 added 0.61% to 7,019
China’s exports grew strongly in March on improving global demand as Covid-19 vaccinations progress, and import growth hit a four-year high, adding to signs of a solidifying recovery in the world’s second-largest economy
China Exports soared 30.6% YoY to $241.1 billion in March 2021, slowing from a record 154.9% growth in February and missing market consensus of a 35.5% growth
China Imports jumped 38.1% YoY to an all-time high of $227.3 billion in March 2021, the fastest pace since February 2017 and compared with market consensus of a 23.3% rise, on higher commodity prices and improving domestic demand. Purchases were up for crude oil (20.8%), natural gas (26.1%), unwrought copper (25.0%), copper ore & concentrates (22.0%), iron ore (18.9%), steel products (16.3%), soybeans (81.6%), edible oil (66.1%), rubber (18.1%), and meat (11.4%)
“While there’s still a lot of uncertainty on the outlook, global economic activity is picking up and keeping commodities prices high,” said Kouta Fujiwara, an economist at NLI Research Institute. “Given the base effect of last year’s sharp fall, Japan’s wholesale inflation may spike to around 3% from April.”
EU Markets
European stocks hovered just below all-time highs on Tuesday trade, little changed by U.S. inflation data that suggested the Federal Reserve’s accommodative policy stance would remain intact
The pan-European Stoxx Europe 600 added 0.12% to 431 and Stoxx 50 added 0.13% to 3,967
Germany’s DAX30 added 0.13% to settle at 15,234
London’s blue-chip FTSE 100 added 0.02% to settle at 6,890
France’s CAC40 added 0.36% to settle at 6,184
Britain’s GDP shrank by 1.6 percent in the three months to February 2021, the steepest period of contraction since May-July but better than market expectations of a 1.9 percent fall. In February alone, the GDP rose by 0.4 percent, compared with forecasts of a 0.6 percent increase, as government restrictions affecting economic activity remained broadly unchanged
The ZEW Indicator of Economic Sentiment for Germany fell by 5.9 points from the previous month to 70.7 in April 2021, not far from September’s 20-year high of 77.4 but well below market expectations of 79.0. It was the first time since November that the indicator has dropped as fears of a stricter lockdown have led to a decline in expectations for private consumption
Oil & Natural Gas Markets
Crude-oil prices rose in early Wednesday trade on strong Chinese import data, but the rally was capped by concerns that pauses on the Johnson & Johnson vaccine could delay economic recovery and limit oil demand growth
The Organization of the Petroleum Exporting Countries in its monthly report on Tuesday raised its forecast for 2021 oil demand growth by 70,000 barrels per day from its previous forecast to 5.95 million bpd, or 6.6%
WTI Crude is trading at $60.58 per barrel
Brent Crude, the international benchmark for oil, is trading at $64.06 per barrel
Natural Gas futures rose slightly to $2.625/MMBtu
“The rise in geopolitical tension will only have a notable bullish impact on oil prices if it is coupled with actual physical supply disruption,” PVM analysts said.
“We’ve been trading in a range, and need clear demand data and direction on U.S. inventories to break out of this trough,” said Phil Flynn, senior analyst at Price Futures Group in Chicago.
Commodities Markets
Gold prices rebounded in early Wednesday trade, from their lowest levels in more than a week after data showing a sharp rise in U.S. inflation bolstered bullion’s appeal as an inflation hedge and weighed on the dollar
Further supporting safe-haven gold were concerns raised by U.S. health officials’ decision to recommend a pause in the use of Johnson & Johnson’s Covid-19 vaccine
Gold is in a “bottoming-out phase” with support at a low of $1,680 an ounce and an upper bound of $1,760 an ounce
U.S. Gold futures (Comex) is trading at $1,745 an ounce
Silver futures (Comex) is trading at $25.34 an ounce
Copper futures (Comex) steady at $4.0390 per pound
In India, Spot Gold is trading at INR 46,423 per 10 grams
“While overall, gold market is bullish short-term, with expectations of a break higher through $1,760-65, caution about fresh 10- and 30-year (Treasury) auctions and the CPI report next week are keeping yields supported, keeping gold’s advance in check,” said Tai Wong, head of base and precious metals derivatives trading at BMO. “Yields are driving most markets at (the) moment, directly impacting U.S. dollar and stocks and all three matter to gold with varying impact.”
Currency Markets
U.S. dollar index, DXY slipped to 91.75 in early Wednesday trade, in a choppy session after the U.S. inflation figures saw beating expectations, jumping to 2.6% in March mainly because of base effect
Aside from the inflation outlook, the Federal Reserve’s insistence that it will keep financial conditions as lenient as possible until the U.S. economy heals seems to be making it difficult for the U.S. currency to attract new investors this month
INR weakened with USD / INR at 75.2670
EUR strengthened with EUR / USD at 1.1943
GBP weakened with EUR / GBP at 0.8689
GBP strengthened with GBP / USD at 1.3743
GBP is expected to be moving closer an over two-month low of $1.367 hit last week, following the Bank of England’s announcement that its chief economist, Andy Haldane, will be leaving the central bank after the June meeting. Haldane was seen as the most hawkish member of the MPC and investors believe he might be replaced by a dovish policymaker
“I guess this may only be a pause with the U.S. dollar selling likely to resume so long as the Fed’s patient rhetoric remains unchanged, especially this early in the anticipated inflation cycle,” Stephen Innes, chief global market strategist at Axi, said.
| 3-Month LIBOR Rate | As on 13 Apr 2021 |
| US DOLLAR | 0.19 per cent |
| Euro | – 0.54 per cent |
| British Pound | 0.09 per cent |
| Swiss Franc | – 0.75 per cent |
| Japanese Yen | – 0.07 per cent |
Bitcoin
Bitcoin / U.S. Dollar fell -0.48% in early Wednesday trade to $63,291 as of 08:00 a.m. I.S.T.
Bitcoin’s performance over the last year is directly aligned with movements in bond yields. When yields rise, so does bitcoin. This implies that the digital currency benefits directly from the “reflation trade” — or the belief that inflation is coming.
British research firm Quant Insight Ltd. shows bitcoin’s key sensitivity is to inflation breakevens. The same is true of gold. The difference, at present, is that bitcoin is positively correlated with breakevens, gaining when fears about inflation rise, while gold is negatively correlated
The current drive in bitcoin therefore looks like a bid to protect against currency debasement, by means of a measured transfer from gold, which is deemed the weaker anti-fiat asset for the moment. Is bitcoin really that direct a substitute for gold? It’s a tough proposition to handle
For now, bitcoin fills a demand for a wider array of alternatives to fiat currencies at a time when many are deeply skeptical of monetary policy, while also promising the kind of exciting growth that tech stocks have done. It’s understandable that there would be wide demand for such an asset. And while that demand is strong, it is aided by that other universal force in markets; fear of missing out
“Bitcoin seems to have it all. It is one of the few assets that seems to benefit from a rising bond yield – something we reserve for true growth stocks and those cyclicals enjoying recovery. Conversely, this is normally detrimental to traditional low-growth safe assets such as gold, defensive yield stocks and bonds. Unlike defensive stocks and bonds, Bitcoin and gold are both inflation-sensitive, but gold is happiest when the world faces a downward spiral. In contrast, Bitcoin prefers a stronger economy, when the yield is rising. This is where we are today,” said Charlie Morris, chairman of ByteTree
Bond Markets
Americas : 10 – Year Govt Bond Yields
United States : 1.63%
Canada : 1.51%
Europe, Middle East & Africa : 10 – Year Govt Bond Yields
Germany : -0.29%
United Kingdom : 0.78%
France : -0.04%
Asia Pacific : 10 – Year Govt Bond Yields
India : 6.01%
Japan : 0.09%
Australia : 1.80%
South Korea : 2.02%
Fund Flows on NSE, BSE and MSEI — 13 Apr 2021
FII/FPI Net Sell Rs (730.81) Crore in Capital Market
DII Net Buy Rs 243.80 Crore in Capital Market
Where We’ve Been Reading —
- Bloomberg
- The Wall Street Journal
- Reuters
- Trading Economics
- Seeking Alpha
- Axios
- Tech Crunch
- NSE Indices India
- Morningstar India
- The Star
- Harvard Business Review
- The Economic Times
