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Inflation Being the Party Pooper Again

The markets have fallen for 4 weeks straight. And while the degree of the fall has been low, the direction has been pretty firm.

Overall, the global outlook itself seems to have deteriorated over the last few weeks, which makes it difficult for the Indian markets to outshine, especially with earnings pulling stocks down across several pockets.

The US 🍔

  • Inflation edged up in July 2023, with consumer prices going up 3.2%, compared to a year ago. While it is still above the Fed’s target of 2%, inflation has slowed down every month since it reached a high of 6.6% in September last year. But rate hike pause expectations were diluted by the fact that despite inflation, retail sales remained strong, and grew for the fourth consecutive month - driven by a robust underlying labour market

  • Moody’s downgraded 10 regional banks on the basis of deteriorating balance sheets. Losses from bad loans were up 17% QoQ, and 75% YoY, resulting from defaults across credit cards and commercial real estate borrowers. Banking trends in real estate have been concerning given high interest rates, lower demand, and the deteriorating ability of lenders to service loans

The UK 👑

  • Inflation in the UK dropped sharply in July, coming in at 6.8% from 7.9% last month. But while the broader number brought some respite, core inflation remained stubbornly high at 6.9%, and inflation for several categories like healthcare and travel actually rose

  • The economy too did well, growing by 0.2% in 2Q 2023 - the strongest growth in the last year. The surge in growth, coupled with strength in wages poses a risk of inflation remaining high, which might just prompt the Bank of England to raise rates

China 🐉

  • Exports, which are the mainstay of the Chinese economy saw a decline of 14.5% compared to last year, sending alarm bells ringing throughout the world. The drop was particularly alarming because it was the steepest decline since the pandemic, and indicated both a global slowdown and a preference away from Chinese goods

  • Additionally, China went into deflation. While hopes are now pinned on the Chinese central bank cutting rates, there are reasons for hesitation on stimulus - the depreciation yuan, and elevated debt levels

Against this backdrop, along with painfully depreciating currency problems across China, Russia and Argentina, India’s situation continues to look better. However, the recent inflation data in India has also cast a shadow on the near-term outlook for the Indian markets, by placing doubt on the longevity of the new status quo on rates.

With continued weakness globally, the turn in direction for the Indian markets might just hinge on potentially better macro data in the coming weeks.

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