Every Monday, Mint’s Plain Facts section features key data releases to keep an eye on during the week. Markets across the world will be waiting for the US Federal Reserve’s meeting this week to get a sense of what policy moves to expect in the coming months. In India, June-quarter earnings are due from Nifty 50 constituents Larsen and Toubro (L&T) Ltd, Axis Bank Ltd, and Kotak Mahindra Bank Ltd. Here are the big numbers to track:
US Fed Meeting
The all-important US Federal Open Market Committee meeting begins on Tuesday. The panel faces pressure to act on sky-high inflation at a time when the labour market has not recovered fully. Investors and fund managers will keenly track Fed projections on hikes in interest rates and slowdown in asset purchases. Emerging economies are particularly anxious. Any hint of tighter policy could precipitate a flight towards safer assets in developed markets, strengthening the dollar and weakening emerging market stocks and currencies.
Such fears have intensified after US retail prices grew 5.4% in June, the quickest in 13 years. Soaring demand, supply bottlenecks, and the White House’s generous fiscal stimulus are all driving prices. However, the Fed has so far remained dovish, terming the spike transitory. The bond markets seem to have bought into that narrative.
Will the sharp June inflation surge make the Fed change tack, or will new Delta variant risks lead to status quo?
The US will release the first estimate for its June quarter gross domestic product (GDP) on Thursday. In the first quarter of 2021, a prompt vaccination drive helped the world’s largest economy expand 6.4% and most analysts expect the country to top that figure in the June quarter. If forecasts of a 9% sequential growth hold, it would be the second-fastest in four decades.
However, economic activity may have peaked in the US, a growing number of economists believe. The composite purchasing managers’ index, an indicator of business sentiment, fell to 63.4 in June. This is a phenomenal expansion rate, but much slower than the one in May. Signs of uncertainty around economic revival is one reason for bond yields being soft, defying the upside inflation trend. If the figures on Thursday are weaker than consensus estimates, it would provide room for continued fiscal and monetary stimulus.
Two major private lenders will announce their June quarter earnings on Monday: Axis Bank and Kotak Mahindra Bank. Credit growth was muted for the sector during the second wave, with stressed credit segments such as medium- and small-scale enterprises likely to see a deterioration in asset quality. However, large private lenders such as Axis are expected to outperform other lenders, propped up by better asset quality, higher provisioning and capital buffers. The retail segment could drive credit growth for Axis, it is also likely to push up slippages, analysts said.
The sequential decline in margins may be muted. Profitability took a hit in the March quarter because of the moratorium-related interest reversals ordered by the Supreme Court. The markets will be keen to hear from the lenders about fresh slippages and the outlook on credit recovery.
L&T Order Book
L&T, India’s largest infrastructure firm, will announce its June quarter results on Thursday. By March, the conglomerate’s order book had returned to its pre-covid annual growth rate of 8%. Analysts expect disruption from the second wave, but not as severe as last year, given better preparedness to fix supply chain issues and to avoid an exodus of migrant labourers. Order book inflows during the quarter, which included major government projects, will be a key metric to watch out for. High commodity costs will hit profitability sequentially, but analysts expect operating margins to expand nearly four percentage points year-on-year because of a base effect. Investors will eye commentary on how fast project executions are likely to return to normalcy, particularly in the key engineering and construction segment. Given the company’s size and influence, its outlook for the coming quarters amid the Centre’s capital expenditure push will serve as an indicator for India’s capex trajectory.
In June, the consumer price inflation in the euro area eased marginally to 1.9% from 2% in May. However, this was most likely a blip. The European Central Bank (ECB) is warming up to the idea of high inflation for now. The July numbers will be in on Friday. Pent-up demand, raw material shortages, and rising energy prices are driving up prices. The ECB insists that this is temporary, maintaining its dovish stance in its last meeting on 22 July, effectively ruling out any tapering of its bond-buying programme in the near future. The central bank had indicated that it was prepared to tolerate transitory inflation overshooting the 2% target. The dovish stance is not entirely misplaced. Unemployment has not yet rebounded to pre-covid levels, the delta variant could harm growth, and recovery is still nascent. The flip side is that inflationary expectations are likely to rise further because of the ECB’s stance.
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