Nifty closed the week in green but stumbled on negative global cues

The Indian market was also supported by upbeat PMI and in line with estimated GDP data

India’s benchmark stock index Nifty closed around 16579.45 Friday; slipping almost -0.29% as it stumbled on negative global cues ahead of the U.S. NFP job report. On early Friday, the Nifty opened in a positive tone by almost +134 points gap-up around 16761.55 and subsequently made a 4-week high around 16791.75. But Dalal Street soon tumbled after the opening of the European session following Wall Street futures ahead of the U.S. NFP job report for May.

On Thursday, Dow Future recovered from ‘stagflation/recession’ panic low on hopes of a September Fed rate hike pause in September. Fed is now debating about the possibility of a rate hike pause in September after May FOMC minutes and Bostic’s comments last week followed by the White House grilling of Fed Chair Powell Tuesday. The market is now assuming that U.S. President Biden may be pressuring Fed Chair Powell for a September pause to boost Wall Street, just ahead of Nov’22 mid-term election.

On early Thursday, Dow Future plunged on guidance warning by Microsoft (amid higher USD) and as Fed’s VC Brainard almost ruled out a September pause. But Brainard also kept the possibility alive. Brainard said the possibility of a September pause is ‘very hard to see right now, but she didn’t say it’s impossible. Subsequently Dow Future recovered as Fed is now clearly debating about the September pause, just ahead of the November mid-term election.

In any way, Fed is on the way to hiking +0.50% in June and July to bring the FFR to +2.00%. Then Fed may pause in September to assess the effect of existing rate hikes on overall economic activities and inflation. If inflation does not ease meaningfully, then-Fed may go for +0.50% or even +0.75% rate hikes in Nov (if inflation accelerates) and December to bring rates to either +3.00% or +3.50%. If there is a meaningful easing of core inflation, then-Fed may go for +0.25% rate hikes in November and December. Thus considering various inflation scenarios, Fed may hike rates to +3.50%, or +3.00% or even +2.50% by Dec’22. Fed’s current neutral estimate is 2.50%-3.00%. Fed Chair Powell may hint at this strategy in the September Jackson Hole symposium.

On Tuesday, Biden met Powell and may have grilled Powell to ensure no hard landing before Nov’22 mid-term election. Thus Powell has to ensure vibrant Wall Street as well as Main Street at least till Nov’22 mid-term election as no President will like to face an election with recession and stock market plunge in the background.

Biden is now trying his best to control ‘Putinflation’ by higher supplies of oil & gas. But Biden is set to lose House in the forthcoming Nov’22 mid-term election; i.e. with a 50:50 Senate, he may become a minority President until Nov’24. Thus Biden/Democrats would have limited or zero fiscal power in hand to rejuvenate the economy, eyeing for Nov’24 Presidential election. So, he may be also looking for QE-5 by early 2024, so that he/Democrats can face the Nov’24 election with vibrant Wall Street as well as Main Street.

Despite faster Fed tightening, the trajectory of inflation is now largely dependent on the Russia-Ukraine war. Till now, there are no signs of any truce between Russia-Ukraine/NATO/U.S. war/proxy war. Moreover, Biden admin is now trying to linger the war until at least Nov’24 mid-term election by continuously supplying military equipment and funds to Ukraine. The U.S. is also supplying Ukraine with short-range 80 km missiles to attack Russian forces in Ukraine without landing the same in Russian territory. But Russia is not trusting Ukraine and has started nuclear war drills in anticipation that Ukraine may attack Russia with U.S. missiles.

Ahead of Nov’22 election, Biden may eventually prefer the economy rather than a proxy war against Russia as ordinary Americans care for price stability and lower cost of living. They are not bothered whether it’s Bidenflation or Putinflation. Thus Biden may eventually prefer an early resolution/ceasefire/peace agreement between Russia and Ukraine as it will meaningfully help to cool commodity prices including oil & gas and various food items. Biden, on his part, may also soon roll back Trump tariffs on Chinese goods as a ‘tax incentive to hard-working Americans’ (voters) ahead of the Nov’22 mid-term election.

Wall Street may soon scale a lifetime high if there is any firm indication of a truce between Russia and Ukraine, brokered by NATO/Europe and the U.S. It will also pave the way for the Fed hikes pause. Both Europe and the U.S. are suffering from high inflation, something which was very unusual till a few months ago.

Now from global to local, Dalal Street will focus on the RBI policy meeting on 8^th June, where RBI may hike by +0.75%, followed by another +0.50% on 4^th August. Fed is set to hike +1.75% till July (from Mar 22) and RBI has to match it by hiking at least +1.65% till August.

On 4^th May after hiking the repo rate by +0.40% in an unscheduled meeting abruptly, RBI Governor Das said RBI is now only reversing COVID pandemic era rate cuts. RBI cuts repo rate by -0.75% on 27^th March’2020 to +4.40% in an emergency move (off-cycle meeting) after the Indian Government announced an all-out national lockdown for COVID. After that RBI further cuts the repo rate by -0.40% to +4.00% on 22^nd May’2020 amid an ongoing national COVID lockdown. RBI has already ‘reversed’ -0.40% COVID rate cut on 4^th May and may also reverse another COVID rate cut of -0.75% on 8^th June.

But in his recent interview on 23^rd May, RBI Governor Das also indicated less hawkish tightening. Modi admin is now responding to RBI’s clarion call to take some action on the supply-side and to reduce taxes on transportation fuel to help inflation down to give RBI some space ahead of RBI meeting on 8^th June, when RBI may hike +0.75% to the the the control demand and inflation.

But now after the Modi admin’s indirect tax cut moves (fiscal/administrative action on supply-side), RBI may go slow on rate hikes to see, whether the supply side action by the fiscal authority (government) will have any real effect on core inflation, which is now hovering around +7.00%, substantially higher than RBI’s +4.00% target. RBI may now hike +0.50% in June instead of +0.75%. then RBI may hike +0.50% in August and September for a cumulative +1.90% rate hike against Fed’s +2.00% move. Then depending on the actual inflation trajectory in India, Fed’s likely/actual rate action moves in September, November, and December, and RBI will also act further in December and February.

Overall, the Nifty surged around +1.42% last week and was almost flat for the first 3-trading days of June amid mixed global cues, upbeat PMI, and in line with expectations of GDP data. Nifty tumbled almost -5% in April and May on a subdued report card, mixed global cues, elevated inflation, the concern of faster Fed/RBI tightening and stagflation or even an outright recession. In April and May, the Indian market was boosted by automobiles, FMCG, MNCs, and IT/techs, while dragged by media (regulatory concern and slowing economy may affect ad revenue in the coming days), PSU banks, selected private banks (elevated NPA and RBI tightening), metals, realty (global correction and imposition of export duties), infra, pharma (subdued report card, US FDC regulatory concern) and IT/Techs (concern of economic recession may affect revenue).

On Friday, Nifty was boosted by RIL (higher GRM and export of diesel to Europe amid lingering Russian geopolitical tensions), Infy, L&T, TCS, HUL, and Sun Pharma, while dragged by Ultratech Cement (higher capex plan), ICICI Bank, Axis Bank, Grasim, Maruti, Bharti Airtel, HDFC Bank, and HDFC. The Indian market was dragged by automobiles (muted monthly sales for May so far), media, MNC, banks, and financials, metals, realty, infra, selected pharma, FMCG, and selected oil & gas/energy companies, while boosted by only IT/Tech sector (Nasdaq bounced back and value buying as the concern of an all-out recession in America and subsequent lower IT spending by US corporates may be overdone).

On Friday, Wall Street Futures also tumbled on better than expected NFP job report, but the fine print reveals overall May and April job reports may be goldilocks rather than a blockbuster. Thus Fed may take a less hawkish stance in September or even go for a pause. On mid-Friday, Wall Street Futures recovered to some extent from NFP low as the fine print of the May job report may be showing it as another goldilocks report. But Wall Street again slips to the session low as Mester downplayed any idea about a September pause.

Fed is now debating about a September pause or smaller hikes after Biden meets Powell on Tuesday. In any way, the May job report and similar Goldilock reports in the coming months may prevent Fed from bigger rate hikes from September amid the easing of wage inflation. This along with the possible withdrawal of Trump tariffs on Chinese goods by Biden (as a tax cut gift to hardworking ordinary Americans ahead of the Nov’22 election), may boost Wall Street as well as Dalal Street, Also, if RBI goes for less hawkish tightening strategy, Nifty Future may also go for lifetime high in the coming days.

Looking ahead, whatever may be the narrative, technically, Nifty Future now has to sustain over 16850-925 for a further rally towards 17000/17175-17225/17325 and further 17450/17700-18000/18400 zones in the coming days. On the flip side, sustaining below 16800, Nifty Future may fall to 16690/16600-16550/16450 and 16375/16275-16200/16000 and further 15725-15650 zones in the coming days.

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