Fed watchers appear to be divided whether the US central bank has signalled it’s going to pause in its rate-cutting spree. What do the markets say?
The dollar weakened in thin Asian trade on Thursday, in maybe a knee-jerk reaction to the disappointment of not getting a clearer statement from the Federal Reserve, or even a “sell on the news” response, rather than an indication that the markets are not convinced about a Fed pause. Base metal prices too firmed, as did crude oil. Gold saw a small bounce. But it’s still unclear whether all this is the result of the 25 basis point rate cut, or whether the market is betting on further cuts. After the announcement, Fed funds futures showed just a 24% chance of another rate cut at the next Fed meeting in June and about the same probability for one in August.
If the minor rally that we’ve had in the dollar fizzles out, then commodity prices could head higher, stoking more inflation. That, in turn, will force central banks in countries such as China and India to tighten monetary policy further, while governments try and force prices down.
The bear case is that the US economy is far from being out of the woods and that leaves the door open to further rate cuts and dollar depreciation, depending on the data. Nor is there any sign of the European central bank cutting rates, which could trigger a dollar rally. Also, the US government has no incentive at all to rein in dollar depreciation, since it helps stimulate exports. All this is bearish for the dollar, good for the US, bullish for commodities and bad news for Indian markets. The silver lining has been the revival of fund flows to Asia. A sustained bounce in equities is would depend on inflationary pressures abating.
Dabur manages cost pressures
Dabur India Ltd, like many of its peers in the FMCG space, has managed to maintain profit margins despite soaring input costs. Adjusted for its investments in its retail venture, a chain of health and beauty stores, operating margin improved by about 20 basis points during the March quarter. Operating profit as a result grew 15.6%, more or less tracking the 14.3% growth in revenues. Both sales growth and margin expansion had been better in the first three quarters, at 16% and 66 basis points, respectively, leading to 20% growth in operating profit.
According to analysts, the company has been able to contain raw material cost pressures through better supply chain management. For the whole year, raw material costs fell by as much as 90 basis points, helped partly by an average 3% increase in selling prices. The company’s consumer health division recorded strong double-digit growth in the March quarter, after having recorded 5% growth in the December quarter and negative growth in the first half of the year. Growth slowed compared with that in the first three quarters owing to a drop in growth rates in international and in its food business.
The company has said that it expects revenues to grow by 15-20% this financial year, which, based on its ability to maintain profit margin, should lead to a similar increase in profit. A recent report by Merrill Lynch notes that the company is well placed to grow profit by about 20% even after accounting for costs related to the retail venture, thanks largely to the company’s rich pipeline of new products and variants. But, note that at current levels, the stock trades at nearly 28 times trailing earnings, which more than adequately captures the estimated growth in profit.
Maruti’s sales bounce back
Maruti Suzuki Ltd has reported a healthy 22.4% growth in domestic sales for the month of April, spurred by a strong 27.3% growth in the A2 segment, which comprises compact cars Alto, Zen, Swift and Wagon-R.
The double-digit growth comes as a relief, especially after two straight months of flat sales. Despite the cut in excise duty on small, effective 1 March, sales in the compact car segment had dropped in the month of March.
In February, the segment’s sales had grown by less than 3%, in anticipation of the excise duty cut in the budget. The company’s A3 segment comprising new launches, SX4 and Dzire (the company has phased out production of Esteem), nearly doubled sales over the last year.
It remains to be seen if sales growth continues to be as strong for the rest of the year. High interest rates continue to be a worry, as most vehicles are purchased through financing schemes. The positive, however, is that last year’s sales represent a relatively low base as the increase in interest rates had begun impacting sales back then.
Also, Maruti shares have underperformed considerably since it started reporting sluggish sales and worries of high interest rates intensified. At the current levels of Rs740 and valuations of about 12 times trailing earnings, analysts see limited downside for the stock.
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