UKGDP,USCPIandsearchfornarratives

In the world of global markets every now and then a new story emerges and becomes the immediate point of attention. It gets quoted everywhere and its impact on the markets are deciphered ad nauseum. One such news item is the wrangling between the two US parties on the size of the pandemic relief package. As per the analysis, markets rise with the hope of the breakthrough and then retrace again. This reminds us of the discussions which used to happen during the time the US debt ceiling had been reached and the senate had to approve its raising. The news at that time was filled with grave consequences if the agreement was not reached and how it would hamper the proper functioning of the government. The debt ceiling as it turns out was an insipid affair but it hogged the limelight nonetheless.

The consequence of such incessant coverage was that a reason was generated for market movements, even if none existed. Rolf Dobelli in his book The art of Thinking Clearly cautions against finding too much causal relationship between events. The small market movements might have appeared in the absence of the said news too. It is only the significant movements which merit a search for reasons. As per Dobelli, not everything is a force fitting of narratives.

After the philosophical excursion let’s have a look at the market movements across the globe. The Dow Jones was up by close to 1% in yesterday’s trading, the Hang Seng is down by 0.1% whereas the Nikkei is up by 2% in the morning trade. The US Dollar Index is trading at 93.25. The US 10 year yield is at 0.66 currently. The Euro has staged a comeback and is back above 1.18. The Pound sterling trades around the crucial level of 1.3060. Gold trades around $ 1937/oz.

On the data side, US CPI data for the month of July was released which showed a 1% YOY rise. The number was better than expected. The US new covid numbers have also stabilized around the 55k levels down from previous week tally of more than 60k per day.

In the UK the GDP growth data for the second quarter was released showing that the UK GDP fell by 20.4% for the quarter ending June after declining 2.2% in the first quarter. The contraction in the two successive quarters is the technical definition of recession. The fall in the UK’s GDP is more than double that of countries like the US and Germany which recorded around 10% decline in the second quarter. The number also betrays the fact that the UK’s economy is very much dependent on the services sector which is still hurting as it requires more people to people contact vis-à-vis manufacturing. Just as a context, Chinese GDP grew by 3.2% in the second quarter on a YOY basis.

Domestically we will see the release of CPI data today. Both bonds and the rupee are trading around the same levels as previous close which is 5.88 for the 10 year paper and 74.84 respectively. We have written previously that the rise in Fx reserve numbers is an important indicator to follow the mood of the regulator on rupee levels. On the FPI side the month of August has seen the net inflow of close to 22k Cr INR in the Indian markets.