FICC TIMES //

THE WEEK GONE BY AND THE WEEK AHEAD

15 Feb 2013

The key events of last week:

The Bank of Japan (BOJ) in its meeting, earlier this week, painted an optimistic outlook for the Japanese economy while stating that there were certain pockets of recovery in the economy and the economy had stopped declining. The BOJ also voted to keep its aggressive asset buying program unchanged in order to achieve the 2 percent inflation target through a virtually zero interest rate while rejecting the proposal to continue with a virtually zero interest rate policy until the bank judges the achievement of the price stability target to be in sight. The Japanese yen recovered and closed at 93.49 after declining to 94.46 earlier in the week while the Japanese stock markets trended lower. On the other hand, the Euro and the European stock markets recovered and remained unchanged week-on-week, after trading lower post the disappointing economic data from the Euro zone. The USD meanwhile strengthened against the Euro and Asian currencies, in line with our expectations as the mood remained largely risk-off. Closer home, this week saw a lot of economic data coming out, mostly negative. While the trade deficit for January widened due to ever rising oil import bill, IIP numbers too disappointed on mining, manufacturing and consumer spending fronts. In addition, the CPI for January increased further to 10.79 percent due to persistently high food prices. The only positive was the WPI number, which softened further to 6.62 percent in January, the lowest in last three years, on the back of softening of manufacturing and fuel inflation. The INR remained weak and closed at a four week low while the Indian stock markets closed at an eight-week low on the back of the negative economic data.

Markets remained very range-bound last week. G-7 meet did not say anything unexpected, though just the expectations of announcements kept the markets edgy through the week. As for India, the markets underperformed the last week too, with flows slowing down after a record USD 4 bn inflow in January. INR too underperformed driven by weak equity and reduced global risk appetite.

The key events of last week:

Euro area industrial production fell by 2.4 percent in the month of December as against a drop of 4.0 percent in November. Production of consumer non-durables dropped 1.3 percent and production of durable goods dropped by 3.9 percent. Capital goods decreased by 2.9 percent and energy increased by 1.2 percent. Month on month, industrial production grew 0.7 percent as against a - 0.7 percent growth in November. Euro area GDP for the fourth quarter ending December 2012 contracted by 0.9 percent y-oy. For 2012, Euro area GDP fell by 0.5 percent, the worst in four years. Among the member states, France, Germany and Italy GDP contracted worst than expected.

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India's trade deficit in the month of January widened to USD 20 bn from USD 17.7 bn in Dec 2012. This was surely not expected as the markets were just about bracing for a higher rupee appreciation, also driven by fiscal consolidation steps driven by the government lately. The Current Account Deficit for this year is likely to come in at 5% of GDP, widest ever.

Japans GDP for the third quarter ending December 2012 contracted for a third consecutive time to 0.1 percent and 0.4 percent for the full year. For the three month period, exports fell 3.7 percent for the second consecutive quarter and private capital outlays fell by 2.6 percent q-o-q. US industrial production contracted by a worst than expected 0.1 percent in January after two months of strong growth and the manufacturing output dropped 0.4 percent led primarily by a 3.9 percent contraction in automotive products. Energy production increased by 3.1 percent.

And closer home....

Indias trade deficit for the month of January came in much higher at US$ 20 bn as against US$ 17.7 bn in December. Exports grew 0.82 percent while imports grew 6.18 percent driven by oil imports which rose by 6.91 percent to US$ 15.9 bn and frontloading of gold imports ahead of the duty hike. Trade deficit for the period April-January 2012-13 widened by 7.93 percent to US$ 167.2 bn as against US$ 154.9 in the corresponding period last year. WPI inflation softened for the fifth consecutive month to 6.62 percent in January as against 7.18 percent in the previous month, the lowest in last three years. Core inflation too declined to 4.1 percent against 4.2 in the previous month. The decline in inflation was due to a softening of manufacturing and fuel inflation. Manufacturing goods inflation in January declined to 4.81 percent from 5.04 percent while fuel inflation declined to 7.06 percent from 9.38 percent. While primary food inflation came in higher, manufactured food inflation softened to 8.22 percent from 9 percent in the previous month, offsetting the impact of higher primary food inflation to a large extent, thus keeping the overall food inflation for the month nearly unchanged.

CPI inflation, on the other hand, continued to rise due to higher weightage of food in the index. CPI inflation for January rose for the fifth consecutive month to 10.79 percent driven by higher food prices, specifically cereal and milk prices.

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WPI and CPI Inflation The December IIP growth fell by 0.6 percent on the back of a marked decline in mining and manufacturing outputs and a clear slowdown in consumer spending The November IIP has been revised downwards to -0.8 percent from -0.1 percent. IIP for November and December confirms that the IIP growth of 8.3 percent in October was more of an aberration due to festive season demand. IIP for the period April-Dec is 0.7 percent. Sector-wise, mining de-grew by 4.0 percent, manufacturing which has the highest weight in the index, declined by 0.7 percent, while electricity grew by 5.2 percent. On use-basis, basic goods grew 2.6 percent. Capital goods, however, show good recovery, declining by 0.9 percent as against a decline of 8.5 percent in November, the least in last eleven months. Capital goods, although having a lower weight in the index, had been a drag on the index showing a steady decline since March barring October numbers which were distorted due to festive demand. The IIP was most impacted by a decline of 4.2 percent in consumer goods, the fastest since February, indicating a marked slowdown in consumer spending. While the slowdown in consumer spending is a definite concern, the positive trend in basic goods and capital goods indicate that the undercurrent in the economy is still reasonably strong. Even in consumer goods, the decline is more pronounced on the durables (8.2 percent) side rather than on the non-durables side (1.4 percent), which implies that consumers are cutting down more on discretionary consumption while non-discretionary demand is still holding out (which again is probably a fallout of high food inflation).
Wts 100.0 14.2 75.5 10.3 Apr-Dec'12 0.7 -1.9 0.7 4.6 Dec'12 -0.6 -4.0 -0.7 5.2 Nov' 12 -0.8 -5.5 -0.6 2.4 Oct'12 8.3 0.0 9.8 5.5 Sept'12 -0.7 2.3 -1.5 3.9 Dec'11 2.7 -3.3 2.8 9.1

IIP Sectoral Mining Manufacturing Electricity

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Source:MOSPI

Use Based Basic Goods Capital Goods Intermediate Goods Consumer Goods Consumer Durables Consumer Non-Durables

45.7 8.8 15.7 29.8 8.5 21.3

2.7 -10.1 1.6 2.6 3.7 1.7

2.6 -0.9 -0.1 -4.2 -8.2 -1.4

1.5 -8.5 -1.6 -0.3 1.3 -1.6

4.1 7.5 9.3 13.7 16.9 10.7

2.8 -12.9 1.7 -0.1 -1.7 1.6

5.5 -16.0 -1.5 10.1 5.1 13.8

15.0 12.0 9.0 6.0 3.0 0.0 -3.0 -6.0 Nov'11 IIP Jan'12 Mar'12 Mining May'12 Jul'12 Sept'12 Nov' 12 Electricity

15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0 Nov'11 IIP Jan'12 Mar'12 May'12 Jul'12 Sept'12 Nov' 12

Manufacturing

Basic Goods

Capital Goods

Consumer Goods

Source: Mospi

IIP: Sectoral

IIP: Use Based

So what does the next week hold...?

The US faces a deadline to reach an agreement before March 1 to avoid automatic spending cuts, called sequestration. Meanwhile, economic data coming from the US continues to add to confidence of a gradual recovery in the economy. The short term positive sentiment created around the Euro zone recovery faded after the data released this week reflected the level of recession in the economies. Recovery seems far off as structural issues of financial deleveraging and sovereign debt crisis remain. In Japan, the BOJ is likely to adopt a more accommodative monetary policy stance with the appointment of a new governor. And now with statements coming from the G-20 meeting indicating no plan for a statement by the G-7 leaders against using exchange rates as policy rates, the yen is likely to continue its downward trajectory. Closer home, worries about a slowdown and twin deficit heightened as the negative data corroborated the CSO forecast for a lower than expected GDP growth this year. On the monetary policy front, although a lower WPI makes case for a rate cut, food inflation
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still remains much above the RBIs comfort zone. However, we feel going forward, in the light of the recently released disappointing economic data adding to slowdown worries, RBI policy will be guided more from the point of view of bringing growth back into the economy while inflation worries would likely take a backseat for the time being. Global markets next week will take cues from the outcome of the ongoing G-20 meeting, whereas locally the markets will now take cues from the direction to be laid out in the upcoming budget and are likely to trade sideways till then.

Important upcoming International events to be tracked:

Date 19-02-2013 19-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 21-02-2013 21-02-2013 21-02-2013 21-02-2013 21-02-2013 21-02-2013 21-02-2013 21-02-2013 21-02-2013 22-02-2013 22-02-2013 22-02-2013 22-02-2013 Country Japan US Germany Japan Germany France UK UK US US US US US US US Japan Japan US US US US US US US US US US Germany Event BoJ MPB Minutes Housing Market Index (Housing Market Index) CPI All Industry Index PPI CPI (Year over Year) BoE MPC Minutes Labour Market Report MBA Purchase Applications Housing Starts (Starts - Level - SAAR) Producer Price Index Housing Starts (Permits - Level - SAAR) Producer Price Index (PPI -Yr/Yr change) Producer Price Index (PPI less food & energy - Yr/Yr change) Redbook Merchandise Trade All Industry Index Jobless Claims Consumer Price Index Bloomberg Consumer Comfort Index Philadelphia Fed Survey (General Business Conditions Index - Level) Leading Indicators Existing Home Sales (Existing Home Sales - Level SAAR) EIA Natural Gas Report Money Supply Money Supply (M2 Weekly Change) Fed Balance Sheet GDP Period Jan, 2013 Feb, 2013 Jan, 2013 Dec, 2012 Jan, 2013 Jan, 2013 Feb, 2013 Jan, 2013 wk2/15, 2013 Jan, 2013 Jan, 2013 Jan, 2013 Jan, 2013 Jan, 2013 wk2/16, 2013 Jan, 2013 Dec, 2012 wk2/16, 2013 Jan, 2013 wk2/17, 2013 Feb, 2013 Jan, 2013 Jan, 2013 wk2/15, 2013 wk2/11, 2013 wk2/11, 2013 wk2/20, 2013 Q4, 2012

Important upcoming Domestic Events

Date 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 20-02-2013 21-02-2013 Event 91 day T- Bills auction of Rs 50 bn (cut-off yld) Reserve Money (change on wk) CPI - Agricultural Labourers(YoY Chg) CPI - Rural Labourers (YoY Chg) 364 day T- Bills auction of Rs 50 bn (cut-off yld) M3 (YoY Chg) GSM mobile subscriber Period Wk to Feb 15 Jan Jan Wk to Feb 8 Jan Frequency Weekly Weekly Monthly Monthly Fortnightly Fortnightly Monthly

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22-02-2013 22-02-2013 22-02-2013 22-02-2013 22-02-2013 22-02-2013 22-02-2013 22-02-2013 22-02-2013

WMA (ways and means advance) - to central govt WMA (ways and means advance) - to state govts FX reserve (change on wk) Bank Deposit (YoY Chg) Bank Credit (YoY Chg) Bank Investment (YoY Chg) Bank Cash Deposit Ratio Reuters Daily Price Chart Bank Investment Deposit Ratio Bank Credit Deposit Ratio

Wk to Feb 15 Wk to Feb 15 Wk to Feb 15 Wk to Feb 8 Wk to Feb 8 Wk to Feb 8 Wk to Feb 8 Wk to Feb 8 Wk to Feb 8

Weekly Weekly Weekly Fortnightly Fortnightly Fortnightly Fortnightly Fortnightly Fortnightly

USD INR kept climbing through the week, pushing past a strong resistance at 53.50-60 and then through 54.0054.10. The short term momentum oscillators are pointing up though we do not expect a major upmove from here. Our view remains 54.40 spot should hold on a day close basis, and therefore, can attempt a short there.

Technical Based View:

USD/INR moved last week as expected given the risk aversion in the global markets We expected the move to at least 54-54.10 last week, though the week closed even higher at 54.24 At the current spot level, we see more upside, but expect the spot to hold the resistance of 54.40 at least on a day-end basis We remain on the sidelines for now, but would want to initiate shorts at around 54.35-54.40 for a pullback to 53.50 ahead of the budget USD/INR

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