2022-08-14 08:25:00

Inflation – Meat and Fish



                One factor, many multiples. Inflation has been the single most important anchoring point to policy makers, punters and the pundits. It has become the Anchor point for everything else. While the inflation continues to remain near or above the comfort zone, markets this week have taken comfort on the numbers directional move. Is there a meat in this or it is the fish still in hot water. 

                Global inflation is expected to hit 7.5% end of 2022 driven by food, energy/fuel, and supply chain disruptions.  In recent months commodities in general have fallen led by a. expectation of recession or hard landing b. relief in supply side. The point a is more or less slowly taken off the table with the economic numbers remaining robust (equity markets leading indicators?) while relief in supply side remains work in progress. Higher interest rates have embedded component of inflation. The latest Consumer expectation of five year inflation in US once again moves to 3% which is the anchor point of larger rate hike. The lower inflation number in US as well as domestic inflation number brought some relief and sanity to the risk assets. The question is, is it a bump or a return to the mandated levels of 2% for US and below 6% for us. The one word response is clearly NO.           

                India Inflation data covers 1114 urban and 1181 rural areas. It covers all the states with above 50 lakh population (22 States as per the 2011 Census). For Food and Beverages factor more than 50% for rural while for Urban it is 1/3rd. Housing is not a factor for rural while for Urban it is 22% that is quite large weightage variation. Fuel and transportation more or less in mid to high single digits, while Miscellaneous a whopping 25 plus percentage. Data is released six week lag. 

                Last three months of data (May to July) shows softer tone in Meat and fish. While surprisingly Vegetables and spices are expensive in Rural areas. Milk and Milk products softer while Fuel remains elevated. Cereals the largest component of Food and beverages is still at 6.90 in July YoY, Vs 5.66 June YOY. 

                Southern States appear on broad brush decelerating trend with Andhra falling from high 8.63 to 7.38 and Telangana 10.05 to 8.58. Increased action seen in Gujarat from 7.50 to 7.85 and W.Bengal 7.34 to 7.80.  States with large borrowings clearly showing inflationary trend. Delhi continues to show decelerating trend even at the low rate from 5.06 to 4.13, while Punjab records falling trend from 6.30 to 5.64. Are these examples of better fiscal management of the states would provide answer when mapped with the growth rates of these states. 

                It is not the equity market, it is the bond market that should reflect the true sentiment of the inflation numbers and that piece is missing as of this writing. US 2 Y prints one more weekly high close 3.25% (recent high around 3.45%), while IN 2 Y is 6.51% recent high being 6.84. The 10 Y yields though remained softer sub 3% for US and Sub 7.5% for India but still elevated. 

                In financial markets clearly optimism feeds optimism and pessimism feeds pessimism. While this can aid the policy makers on the dangers of recession or the lower growth fears to subside, a reality check is always the go getter. While the meat in the middle is encouraging the fish is still in the hot water though it is getting used to the warmth.