Dow, Nifty slip on fading hopes of an early Fed/RBI rate cut

On Friday, Wall Street Futures jumped to a fresh life time high on tech/AI/NVIDIA boost but stumbled in late hours trading after Fed’s Williams, an influential FOMC policymaker almost poured cold water on early Fed rate cuts. The market may be also now concerned about elevated valuation, both technically and fundamentally. Wall Street was also undercut by fading hopes of an imminent Gaza war ceasefire as Israel's PM Netanyahu alludes to ongoing hostage negotiations, uncertain of outcome in a CBS interview. Netanyahu also predicts "weeks away from total victory" regarding the Rafah operation. Gold got some boost, made a high around 2041, but eventually slipped again around 2025 Monday as the U.S. is trying for a permanent peace solution, while USD/US bond yield recovered despite hawkish jawboning by ECB’s President Lagarde.

On Monday, Wall Street Futures further slipped on negative cues from China after a wave of Moody’s downgrades for various Chinese companies, and fading hopes of big stimulus from China. On Friday, Moody's Investors Service removed credit ratings for 11 Chinese companies in an extraordinary frenzy that highlights the repercussions of record default rates. Traders are now waiting to see if the government would provide additional stimulus after President Xi urged for a boost in traditional consumer product sales, such as cars and home appliances. Expectations for new measures were also spurred by weak borrowing by local governments, sparking speculation that Beijing will pick up the slack and incur more debt. Global bond yields were also in an uptrend as Japan may exit YCC and NIRP in April, followed by some rate hikes (BOJ tightening talks).

On Monday, ECB President Lagarde said:

·         The ECB is not there yet on inflation

·         We have to get to 2% inflation sustainably

·         The current disinflationary process is expected to continue, but the governing council needs to be confident that it will lead us sustainably to our 2% target

·         We expect inflation to continue slowing down, as the impact of past upward shocks fades and tight financing conditions help to push down inflation

·         There are increasing signs of a bottoming out in growth and some forward-looking indicators point to a pick-up later this year

·         Wage pressures, meanwhile, remain strong

·         Labor cost increases are partly buffered by profits and are not being fully passed on to consumers

·         Increasing signs of bottoming out in growth

On early Monday, the US Deputy Treasury Adeyemo said:

·         The dollar's dominant role in the global financial system will depend on the strength of the US economy, the attractiveness of us investments

·         Does not expect the us govt to shut down due to lack of appropriations

·         Clear that the Chinese economy is facing challenges from the property sector, demographics

·         Not concerned about headwinds for the US economy from China's economic challenges

India’s Nifty surged in February on positive global cues, favorable macros, and Modinomics optimism:

India’s benchmark stock index Nifty closed around 22122.05 Monday (26th February), slumped -0.41% on negative Asian/Chinese and US cues. Nifty was dragged by techs/exporters. But overall, Nifty surged around +1.82% for the month (till 26th February) on positive global/US cues amid hopes & hypes of an early Fed/RBI pivot. India’s Dalal Street was also boosted by upbeat earnings (EPS) growth, improving macro-economic data including softer inflation and lower trade deficit coupled with a stable currency (INR) as RBI continues its hawkish hold stance without indicating any discussion about rate cuts in H2CY24, contrary to Fed’s stance, which is slated to cut 75-100 bps in H2CY24 from July’24. India has also a comfortable BOP (Balance of Payment) position despite a consistent trade deficit in merchandise export as service export is quite robust coupled with increasing remittances from ever-growing NRIs.

On Monday (12th February), the MOSPI flash data shows India’s annual (y/y) CPI (inflation) eased to +5.1% in Jan’24 from +5.69% sequentially, in line with the market consensus and lowest in three months due to lower food & fuel inflation and favorable base effect.

On a sequential (m/m) basis, India’s total/headline CPI decreased -0.1% in Jan’24 from -0.3% in Dec’23, in line with market expectations and long-term seasonal trends due to lower food inflation, especially winter vegetables.

Overall, India’s average CPI was around +5.7% in 2023 against +6.7% in 2022 and +5.6% during CY19-23. Now the 3M/6M rolling average of total CPI is around +5.1%, quite elevated and still substantially higher than RBI’s target of +4.0% on a durable basis.

 

As per an unofficial estimate, India’s annual (y/y) core CPI also eased around +3.6% in Jan’24 from around +3.9% sequentially.

Overall, India’s average core CPI was around +5.0% in 2023 against +6.0% in 2022 and around +5.25% during CY: 19-23. Now the 3M rolling average of core inflation is around +3.9%, while the 6M rolling average is around +4.2%; almost at +4.0% price stability targets; the recent low was around +3.4% in Oct’19 (pre-COVID days).

Although, India’s core inflation was steady at around +4% for the last 6 months, officially RBI follows the total CPI target of +4.0%. Also, India’s real GDP growth is now running above +7.0%, above/in line with trend/EBI estimates, RBI is now focusing on bringing back headline CPI towards +4.0% targets on a sustainable basis with a higher for a longer policy without signaling any rate cuts in H2CY24 (unlike major global central banks such as Fed/ECB).

The market was expecting some dovish stance from RBI on 8th February (MPC meeting) such as the official declaration of the end of the tightening cycle/removal of accommodation stance to a so-called neutral stance and subsequent logical next step of rate cuts amid cooling core inflation almost around 4% targets in a sustainable basis. But RBI/Governor Das sounded less dovish than expected.

Unlike Fed/ECB, RBI, under Governor Das usually does not provide any specific/clear forward guidance, but RBI may officially announce neutral mode/end of tightening cycle in an April meeting before going for 75-100 bps rate cuts from Aug’24 (in line with Fed) as even after rate cuts of 75-100 bps, real core repo rate (compared to core CPI) will be positive and maybe still termed as restrictive rate zone.

Presently, RBI's core repo rate is around +2.00% (repo rate 6.50% - 6M average core CPI 4.50%); thus even if RBI cuts 75 bps in H2CY24 (in line with Fed), it would be around +1.25%, real positive; i.e. restrictive and also within RBI’s range of neutral policy range (1.00-2.00%). In India, RBI never goes to zero/negative real rate (unlike Fed/ECB) to stimulate the economy; RBI always maintains positive real repo rate in a balancing act to ensure no policy flip-flop cycle and financial discipline. A positive real rate is also beneficial for banks & financials amid higher NIM; this will also ensure a robust balance sheet for banks & financials, essential/good for any economy. For Fed, the neutral rate; i.e. preferred real positive rate range is 0.50-1.00%.

Now, ahead of the election, RBI may not take any undue risk by cutting rates prematurely ahead of the Fed, causing higher USDINR and higher imported inflation, everything being equal. RBI may shift to neutral mode in April and go for rate cuts from Aug’24, if the Fed goes for the same from July’24.

For the incumbent Modi government, the biggest risk for a 400+ LS seat in the forthcoming general election may be sticky & elevated inflation, now running around +5.0% for the last 4/5 years consistently, which means prices may double (+50%) even for daily essential goods & services for every 10-years if rate of inflation does not cool significantly. Also, India’s elevated unemployment rate of around 8% along with underemployment, almost 45% youth unemployment rate, and significant inequality in wages is a huge political risk for the Modi government in the 2030 general election if not addressed properly despite PM Modi’s incredible leadership appeal along with development, good governance, anti-corruption, targeted social welfare schemes and Hindutva platform.

Technical trading levels: Nifty, DJ-30, NQ-100 Future, and Gold

Whatever the narrative, technically Nifty Future (22138) now has to sustain over 22500 for a further rally to 22600/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 22450/22350-2250/200 may further fall to 22150/22100-22000/21900 levels, may fall to 21800/21550*-21475/21250, and further 21125/20850-20725/20575-20350. And sustaining below 20350, Nifty Future may again fall to 20150/20000-19900/19650 and 19400/19150-18850/18700 in the coming days.

 

Whatever may be the narrative, technically Dow Future (39090), now has to sustain over 39500 levels for a further rally to 39700/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39450-39350 may again fall to 39250/200-39150/39000-38950/38600 and  38400/38200*-38000*/37300 levels in the coming days.

Similarly, NQ-100 Future (17945) now has to sustain over 18400 levels for a further rally towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18350/300-18250/200 may fall to and 17300-16830-16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2031) now has to sustain over 2045-2055 for any further rally to 2067/2085-2100/2125-2130/2175; otherwise sustaining below 2030, may again fall to 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.