FICC TIMES

THE WEEK GONE BY AND THE WEEK AHEAD

18 Jan 2013

Global Growth outlook has improved though macro risks remain. Ever since the unlimited bond buying announcement was made by ECB, the tail risk from Euro has been eliminated. That established the biggest support for risk taking in the current environment

Last week saw a lot of positive economic data emerging from US and China leading to a rally in global markets. The U.S. equity benchmark closed the week at a five-year high on strong housing and labor market data and better than expected earnings from the corporate sector. Adding to the positive sentiment, the US House of Representatives said they would seek to break the budget impasse next week. The risk-on mood in global markets also led to gains in most of the Asian currencies, while the USD gained against its European counterparts. The Japanese yen, continued its slide hitting a 31-month low against the US dollar ahead of a potential asset purchases by the Bank of Japan. Data emerging from China pointing to growth accelerating in China provided a further impetus to markets. Closer home, the rupee ended the week at a 12- week high after the government partially deregulated the hugely subsidized diesel prices, fueling hopes of reining in the fiscal deficit. The Indian stock markets, following the global trend and further fueled by the local developments, closed the week at a two year high. The lower WPI inflation data, released earlier this week, makes the possibility of a rate cut in the upcoming RBI policy a certainty, however higher CPI due to higher food inflation is likely to remain in the central banks focus, thereby limiting the extent of the cut.

The key events of last week:

The US housing data reported strong growth in December, exceeding all consensus estimates. New building permits increased by 28.8 y-o-y and 0.3 percent sequentially to 903,000. Housing starts were up 12.1 percent from the revised November data and 36.9 percent over December 2011. Overall in 2012, building permits increased 30.3 percent and starts grew 28.1 percent.
The claims for state unemployment benefits this week fell 37,000 to a seasonally adjusted

335,000, the lowest level since January 2008 US industrial production increased by 0.3 percent in December as against 1.0 percent in 108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51 November (when production rebounded in industries that were hit due to Hurricane Sandy). Page 1

THE WEEK GONE BY AND THE WEEK AHEAD.

Manufacturing output increased 0.8 percent against 1.3 in November, mining output increased 0.6 percent and utilities dropped by 4.8 percent, due to unseasonably warm weather that kept down the demand for heating. For the quarter industrial production grew 1.0 percent. Capacity utilization was 78.8 percent, 1.5 percentage point below its long run average. US CPI U data for the month of December remained unchanged on a seasonally adjusted basis vis--vis a 0.3 The world has risen PMIs improve in most nations in the last few weeks. Chinese data has been steadily improving too, providing a reasonable backdrop for risk taking in H1, 2013. Equities look very steady registering slow but steady progress. percent decrease in November

Chinas GDP grew 7.9 percent in the fourth quarter, slightly ahead of expectations. For the full year the Chinese economy grew by 7.8 percent, the slowest in since 1999, however, exceeding the 7.5 percent target by the government. Chinese industrial production rose 10.3 percent in December, better than expected and fixed asset investment for the year increased by 20.6 percent. Housing sales in China grew 11 percent y-o-y and real estate investment grew 16.2 percent

Buoyed by the positive economic data pointing towards growth accelerating in the economy, the Shanghai Composite index gained 3 percent in the week and 17 percent in the last month, from a four year low, while the Chinese Yuan appreciated 0.23 percent against the US dollar

After strengthening a bit during the week, the Japanese Yen continued its slide against the US dollar after a meeting between the BOJ Governor Masaaki Shirakawa, Finance Minister Taro Aso and Economy Minister Akira Amari led to speculations of the BOJ announcing an open ended asset purchase program at its policy meet next week to achieve the 1 percent inflation target advocated by the Prime Minister. Finance Minister Taro Aso said the government and the BOJ will release a joint statement at the next week policy meeting

Japans benchmark Nikkei surged 2.9 percent for its biggest daily gain in 22 months as the yen resumed its downtrend, improving earnings prospects for Japanese exporters

And closer home....

108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51 The WPI inflation for December moderated to 7.18% as against 7.24% in November, primarily Page 2

THE WEEK GONE BY AND THE WEEK AHEAD.

due to lower non-food manufactured goods or core inflation. Notably, core inflation with the highest weight (55%) has been steadily declining and is the primary reason for easing of WPI. Food inflation, as indicated by primary articles has accelerated to 11.16% from 8.50% in November. However, manufactured food inflation was lower, possibly due to sluggish industrial activity as also seen by the flat IIP growth numbers. With monthly and momentum inflation both easing, the possibility of a rate cut by the RBI in its upcoming policy becomes clearer. Back home, things are definitely improving right soundbytes from the government, declining Inflation, improving PMI, and some improvement in the trade deficit. We expect the Balance of Payments to improve for the rest of this fiscal to under 10 bn negative for the year 2012-13. The Combined CPI for the month of December, however, increased to 10.56% as against the revised 9.9% in November on the back of high food and fuel inflation, indicating inflationary pressures persisting at the retail end

Source: MOSPI, RBI

In a significant development this week, the Indian government partially deregulated the price of diesel by allowing oil retailing companies to raise the price of diesel in small amounts every month. Diesel currently accounts for 40 percent of Indias fuel consumption and the government loses Rs. 9.6 on every litre sold. Finance Minister P. Chidambaram recently reiterated the governments commitment to retain fiscal deficit at 5.3%. This diesel price deregulation is the latest attempt by the cash strapped government to stick to its fiscal targets The INR ended the week at a 12- week high after the diesel deregulation news and the equity markets too, following the global trend and further fueled by the local developments, closed the week at a two-year high

So what does the next week hold...?

While the positive economic data coming from China points towards accelerating growth in the economy, the key mandate for the government in the current year would
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THE WEEK GONE BY AND THE WEEK AHEAD.

be to stabilize growth. The Chinese government has been making the right noises by accelerating investment-project approvals and increased spending on infrastructure. The Chinese recovery is also good news for economies like Japan, which is counting on an export led revival in growth. In the US, the debt ceiling overhang seems to have been put on a back burner for the time being as the Republicans signaled to vote next they vote next week on a temporary increase in the debt-limit. The key event next week would the BOJ policy meet next week where the market is expecting an announcement about an open ended asset purchase program.

Important upcoming International events to be tracked:

Date 21-01-2013 21-01-2013 22-01-2013 22-01-2013 22-01-2013 23-01-2013 23-01-2013 23-01-2013 23-01-2013 23-01-2013 23-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 24-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 Country Japan Germany UK US US UK UK US US US US Japan US US US US US US US US US US US Japan Japan Japan UK Event Bank of Japan Announcement PPI CBI Industrial Trends Survey (Level) Existing Home Sales Richmond Fed Manufacturing Index (level change) Labour Market Report BoE MPC Minutes MBA Purchase Applications ICSC-Goldman Store Sales Redbook FHFA House Price Index Merchandise Trade Jobless Claims Bloomberg Consumer Comfort Index Leading Indicators EIA Natural Gas Report EIA Petroleum Status Report EIA Petroleum Status Report (Crude oil inventories (weekly change)) EIA Natural Gas Report (Weekly Change) EIA Petroleum Status Report (Gasoline (weekly change)) EIA Petroleum Status Report (Distillates (weekly change)) Money Supply Fed Balance Sheet CPI Merchandise Trade BoJ MPB Minutes GDP Period Jan, 2013 Dec, 2012 Jan, 2013 Dec, 2012 Jan, 2013 Dec, 2012 Jan, 2013 wk1/18, 2013 wk1/19, 2013 wk1/19, 2013 Nov, 2012 Dec, 2012 wk1/19, 2013 wk1/20, 2013 Dec, 2012 wk1/18, 2013 wk1/18, 2013 wk1/18, 2013 wk1/18, 2013 wk1/18, 2013 wk1/18, 2013 wk1/14, 2013 wk1/23, 2013 Dec, 2012 Dec, 2012 Dec, 2012 Q4, 2012

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THE WEEK GONE BY AND THE WEEK AHEAD.

Important upcoming Domestic Events

Date 21-01-2013 23-01-2013 23-01-2013 23-01-2013 23-01-2013 24-01-2013 24-01-2013 24-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 25-01-2013 Event GSM mobile subscriber 91 day T- Bills auction of Rs 50 bln (cut-off yld) 364 day T- Bills auction of Rs 50 bln (cut-off yld) Reserve Money (change on wk) M3 (YoY Chg) Output of Crude oil Output of Refinery Output of Natural gas IIP Core (YoY Chg) WMA (ways and means advance) - to central govt FX reserve (change on wk) WMA (ways and means advance) - to state govts Bank Deposit (YoY Chg) Bank Credit (YoY Chg) Bank Investment (YoY Chg) Bank Cash Deposit Ratio Bank Investment Deposit Ratio Bank Credit Deposit Ratio Period Dec Frequency Monthly Weekly Fortnightly Weekly Fortnightly Monthly Monthly Monthly Monthly Weekly Weekly Fortnightly Fortnightly Fortnightly Fortnightly Fortnightly Fortnightly Fortnightly

Wk to Wk to Dec Dec Dec Dec Wk to Wk to Wk to Wk to Wk to Wk to Wk to Wk to Wk to

Jan 18 Jan 11

Jan Jan Jan Jan Jan Jan Jan Jan Jan

18 18 18 11 11 11 11 11 11

Technical Based View:

The Indian Rupee had a good run last week declining from levels of near 55 at close of the previous week to 53.75 on Friday Short term momentum oscillators are all pointing lower, opening up 53.00-53.30 as distinct possibility for the currency pair in the next few days In the immediate short term, there could be some retracement to higher levels of say 54.15054.25 range but those look clearly as excellent levels to sell

108, Madhava, Bandra Family Court Lane, BKC, Bandra(E), Mumbai 51

Daily USD/INR Chart: Reuters

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