WPI at lowest level in three and half years to help bond yields trend down
India’s WPI (Wholesale Price Inflation) for the month of April 2013 came in at 4.89%, the lowest level since November 2009. The market was expecting inflation to come in at levels of 5.50% for April. Inflation for the month of March 2013 stood at 5.96%. Inflation for the month of April 2012 was 7.49%. Inflation trend is clearly down though there are doubts raised on the gap between WPI and CPI (Consumer Price Inflation). CPI inflation stood at 9.3% a difference of 4.41% with the WPI. The CPI has high weight of food at 47%, and with food inflation trending at 10.61% in April; the CPI is showing a strong divergence with the WPI. However, even CPI inflation is showing a falling trend with the inflation down from 11.01% seen in February 2013.
Non Food Manufacturing inflation, which is seen as core inflation has come off from levels of 4.5% seen in February 2013 to 3.4% in April 2013. Fall in manufacturing inflation indicate the lack of pricing power for manufacturers. Fuel price inflation has come off 10.6% to levels of 8.8% over the last three months.
The inflation outlook is becoming more positive and expectations are that inflation, both WPI and CPI, will trend down in the next few months. Falling inflation expectations will feed into easing monetary policy stance of the RBI and this will lead to positive sentiments on government bond yields. Ten year benchmark government bond yield is down 100bps over the last one year and is likely to trend lower from current levels of 7.35%.
The outlook for economic growth is not very positive with RBI forecasting a GDP growth of 5.7% for fiscal 2013-13, up from levels of 5% seen in fiscal 2012-13 but well below trend growth levels of 8% and above. The economy requires a low interest rate regime to start looking up as interest rates work with a lag.
The fiscal year 2013-14 started off on a negative note with overall domestic vehicle sales showing negative growth and passenger car sales showing a fall of 10.43% for the month of April 2013. Manufacturing PMI and Services PMI (Purchasing Managers Index) for April fell for the second and third straight month respectively. Trade numbers showed a fall of 21.6% in exports while trade deficit rose by 72% on the back of gold imports of USD 7.5 billion.
China came out with disappointing numbers for April 2013 with industrial growth coming in below expectations at 9.3%. Manufacturing index dropped in April. Exports showed a 14.7% year on year growth but there are issues of over invoicing in the export numbers. Economics are downgrading China’s GDP growth for 2013-14 to 7.8% from original estimates of 8%. First quarter 2013 GDP growth came in at an annualized rate of 7.7% down from 7.9% seen in the fourth quarter of 2012. China’s inflation for April came in at 2.4% up from 2.1% seen in March.
Eurozone manufacturing and services contracted for the fifteenth month in succession in April. Eurozone inflation fell to a three year low at 1.2% in April while unemployment touched record highs of 12.1%. Eurozone economy is expected to contract in 2013.
US economy added better than expected 165,000 jobs in April while its unemployment rate fell to a four year low of 7.5%. US retail sales rose in April by 0.1% against a 0.5% fall in March 2013. US economy expanded by 2.5% in the first quarter of 2013 against a 0.4% expansion seen in the fourth quarter of 2012. Core inflation was at 1.2% for March against the Fed’s threshold rate of 2%. US economy is seeing growth that is higher than many countries in the developed world.
May 2013 saw central banks cut policy rates in the face of slowing economic growth. RBI, ECB, RBA (Reserve bank of Australia) and BOK (Bank of Korea) cut benchmark policy rates.
Table 1: Key Economic Indicators