IIP JUMPS UP, SO DOES INFLATION!

This was very good news, especially given the gloom and doom. IIP for July was much higher than expected – a good thing, while retail inflation for August was also much higher than expected – which is not such a good thing.

Retail inflation came in higher at 3.21%; though this is higher MoM, this is still much within the targets of the RBI. And with IIP coming in much higher than expected, does this mean that the economy is bouncing back? Well, one month data is not enough to draw this conclusion. We need to see if this is sustainable or else it will be a mere flash in the pan.

Lets not get too excited with this IIP number as what we actually saw and are seeing on the ground is much different from what we are seeing in the IIP. The growth has come in on account of consumer non-durables, which is basically FMCG goods and such. But what we need to look at is the industrial numbers – capital and durables goods remain in the negative. It would be too naïve to change the GDP numbers or suddenly expect everything to be hunky dory. The harsh truth is that the market needs to brace itself for the Q2FY20 earnings, which are not expected to give one any adrenalin rush.

Internals of CPI: (MoM)

• CPI at 3.21% v/s 3.15%
• Food 2.99% v/s 2.36%
• Pulses 6.94% v/s 6.82%
• Vegetables 6.90 v/s 2.82%
• Fuel & light -1.7% v/s – 0.36%
• Housing 4.87% v/s 4.84%
• Cereals 1.3% v/s 1.31%
• Clothing & footwear 1.23% v/s 1.65%

The IIP numbers show that in terms of industries, 13 out of the 23 three industry groups in the manufacturing sector have shown positive growth during the month of July 2019 as compared to the corresponding month of the previous year. The industry group ‘Manufacture of food products’ has shown the highest positive growth of 23.4 percent followed by 17.3 percent in ‘Manufacture of basic metals’ and 15.0 percent in ‘Manufacture of wearing apparel’. On the other hand, the industry group ‘Manufacture of paper and paper products’ has shown the highest negative growth of (-) 15.4 percent followed by (-) 13.3 percent in ‘Manufacture of motor vehicles, trailers and semi-trailers’ and (-) 10.9 percent in ‘Printing and reproduction of recorded media’.

Internals of IIP: (MoM)

• IIP 4.3% v/s 2%
• Manufacturing 4.2% v/s 1.2%
• Capital goods -7.1% v/s -6.5%
• Primary goods 3.5% v/s 0.5%
• Intermediate goods 13.9% v/s 12.4%
• Consumer durables -2.7% v/s -5.5%
• Consumer nondurables 8.3% v/s7.8%
• Electricity 8.2% v/s 7.4%
• Mining 4.9% v/s  1.6% v/s 3.2%

Meanwhile the markets are expected to react positively tomorrow – not just this IIP number but the stimulus package from the ECB is sure to be bring some cheer.

This is what the ECB did today:

• Deposit rate cut by 10 basis point to -0.5%.
• A tiering system will be introduced.
• Forward guidance on rates is no longer calendar based but open-ended and state-dependent.
• QE will be restarted with €20bn per month, starting 1 November. There is no end date added to QE.
• The TLTROs will be repriced and include an incentive for banks to increase lending. Along the lines of the first two generations of TLTROs, banks which exceed the benchmark ECB loans will be charged at the deposit rate.

This comes on the back of the trade war between USA and China showing some signs of a thaw. China, yesterday its first batch of tariff exemptions for 16 types of US products, including some anti-cancer drugs and lubricants, as well as animal feed ingredients whey and fish meal.  And showing a “gesture of goodwill”, Trump tweeted that the United States had agreed to delay increasing tariffs on $250 billion worth of Chinese imports from Oct. 1 to Oct. 15. The tariffs were set to increase to 30% from 25% on the goods.

So for now, as this week ends, lets look at things positively, at least on the global front.