Central Banks Direction - India and Inflation

Published: Thu, 09/22/16

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The Complete Market Analysis
Dear ,

A short note on my thoughts with the recent Central Bank meetings and a very Insightful video on Where India stands Today after all the reforms and Growth, and what is the way forward.


FED: It's the Inflation stupid!
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After reading a lot of thoughts over months on what the FED really intends to do and hearing the two Central Banks speak back to back, Clearly they continue to have one target in Mind....INFLATION. For a world awash in Debt the only path out of it without causing much disruption is to focus on the denominator in the ration DEBT/GDP. Allow Nominal GDP to expand at a small clip every year on the back of Inflation and we might get the Debt problem solved. It has worked before but there is no history of the starting point itself being so big and Global. But the target remains. After years of trying and the Baton being passed around from the FED to Japan and to Europe, now that the effects of the round have died down the Baton is back with the FED. So they are at it with a clear target 2% Inflation sometime in the next two years. Given that growth is already slowing in the US the only Reason I can think as to why the FED is waiting to raise interest rates is that they are waiting for some Inflation to show up.

 

This chart above from Martin Pring's recent InfoMail fives an insight into the typical trend to higher interest rates. First Inflation Sensitive sectors like mining and energy among others. Start to rise and give a buy signal [Middle Indicator], and months later Bond Yields turn up. So rising yields are hear to stay. Except that the FED is holding back to see Inflation in the Face at 2% and more. So my read through is that they are going to allow the Dollar to fall and drive up commodity prices and Inflation sensitive stocks and sectors in the S&P to the point where they see the Inflation they need to raise rates. But they are going to raise rates as seen in the Many Indicators in Martin Pring's report. This should be particularly interesting to Commodity traders and investors. That aligns with why the dollar is bearish for now down to 92-91.50 and Yesterday I published many bullish options for Commodities. You can scroll through them HERE


Go To MCX Updates
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Till that point markets can celebrate the low rate environment. Sure it is possible that we do not get enough inflation. But till the tide turns a speculative rally in commodities and EM currencies has been triggered. But remember that a weak dollar is also a strong Euro and a Strong Yen and that is not what is desired by Europe or Japan. But right now no one cares where inflation comes from. The Baton has been passed to the Dollar for now and once they are done reflating the Baton will be passed again to Japan and Europe just like before. The Euro has remains in a triangle trading range shown above for almost 2 years now, and this has triggered hopes of a Dollar decline. As long as we do not see the Euro go above 1.155 or below 1.10 no one is going to mind. But out of this range up Inflation wins, and down from this range Deflation wins. Right now from the lower end to the upper end Reflation wins and everyone is happy.


If the world does finally see the light of the day on Inflation again what might it means for India? Rates maybe low for now but if they are going to eventually rise we have a hanging sword out there months ahead. Inflation is good for Equities in general but In India the fear of rising rates and the impact on Bond markets and then on the INR would eventually mean that currency risks with over-ride equity risk. This is not so important to Indians investing for an Inflation hedge but it will matter to FIIs investing for Dollar returns. But this risk maybe months away while the Euro Dollar is still in the range above.


The world has passed the point where what is good for one is good for all. As the arbitrage opportunities of Globalisation narrow down for Every Nation that derives a win there are losers elsewhere. The dollar rally in 2015 say inflows into US assets at the cost of commodity producing countries. The Dollar fall will see reallocation of Assets as well in favour of Inflationary trends. At least till the Inflation targets are achieved.

  India's Road to Prosperity: Two Steps Forward, One Step Back
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Rohit Srivastava
www.indiacharts.com
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