The fall in inflation predicted by the World Bank is not the end of the matter. Apart from its baseline scenario, the bank also has two other possible outcomes for 2023 -- a ‘Sharp Downturn’ and a ‘Global Recession’. (Representative image)

Dear Reader,

Retail inflation came down in both the US and India in December 2022, but that was entirely to be expected. With commodity prices coming down and supply chain pressures easing on the one hand and with global growth slowing on the other, inflation is on its way down. The World Bank, in its ‘Global Economic Prospects’, forecasts global consumer price inflation to fall from an average of 7.6 percent in 2022 to 5.2 percent this year.

Indeed, one major reason for the markets being propped up is that lower inflation is expected to allow the US Fed to apply the brakes to its rate hiking spree. The CME’s Fedwatch tool showed that, after the latest CPI print, the odds of a 25 basis point hike at the Fed’s next meet ending February 1 went up from 77 percent to 92 percent, while the odds of a 50 basis point hike is now a mere 6.7 percent. Similarly, the odds of a 50 basis point hike at the Fed’s March meet fell from 18.6 percent to a mere 5.2 percent. Small wonder then that equity markets are up, though modestly.

But the fall in inflation predicted by the World Bank is not the end of the matter. Apart from its baseline scenario, the bank also has two other possible outcomes for 2023 -- a ‘Sharp Downturn’ and a ‘Global Recession’. In a sharp downturn, global retail inflation is predicted to be 5 percent and under a global recession, it’s expected to fall further to 4.4 percent. What’s interesting, though, is that the global consumer price inflation average rate from 2015-19 was a much lower 2.3 percent. In other words, even a recession won't take inflation back to pre-pandemic levels.

Simply put, the World Bank expects inflation pressures to persist in 2023. The World Bank says, “Although inflation is likely to gradually moderate over the course of the year, there are signs that underlying inflation pressures could be becoming more persistent.” Mohamed El-Erian writes in the FT (free to read for Moneycontrol Pro subscribers), “The Fed’s shift to an aggressive front-loading of interest rate hikes came too late to prevent the spread of inflation into the service sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to a higher risk of accidents induced by additional policy mistakes undermining growth.” In his column, Vikram Kotak said that while inflation will come off its highs, it may remain persistently sticky on account of geopolitical risks.

The markets are also being supported by China’s dramatic U-turn in its zero COVID policy. This story argues that Xi Jinping is keen to get growth going in China. If China does indeed make a full comeback, commodity prices could move up once again, although supply of goods too will increase. But the jury is still out on how big a stimulus the Chinese government will deploy and my colleague Shishir Asthana weighed in on whether China’s opening up can revive the oil market.

What about India? Here’s what the JPMorgan Global Composite PMI news release said: “India and Ireland were the only nations to register growth of economic activity in December. Japan registered a stabilisation in output while the US, China, euro area, the UK, Brazil, Russia and Australia all saw downturns. The US fell to last place in the PMI Output Index league table.” That growth is seen in sticky core inflation, in spite of lower food inflation and lower input prices.

Our Economic Recovery Tracker continues to be upbeat. The government has been spending heavily on infrastructure and we recommended one way to play the theme. We also wrote about this passenger vehicle and EV adoption play. And it is the bullish domestic India story that is sending investors scurrying to midcap and smallcap funds.

There is, of course, an undercurrent of tension. How could there not be, when the continuation of good times assumes 1) a perfect landing for the global economy after the greatest monetary stimulus of all time, 2) no escalation of the economic war between the US and China, 3) no escalation of the war in Ukraine, 4) no disruption due to climate change, 5) a soft landing in China and 6) no impact of the high levels of debt accumulated by governments.

The next crisis could erupt in unexpected places. For instance, a report in the Japan Times said the Bank of Japan is likely to end its yield-curve control policy between April and June this year. With inflation at 4 percent in December, bond yields in Japan have surged higher, piling pressure on the central bank’s ultra-loose policy.

In India, the contrarian view was expounded by Aurodeep Nandi, India economist at Nomura, who projects GDP growth at a low 4.5 percent for 2023. And even if the Indian economy continues to do well, that doesn’t guarantee runaway equity returns, as Harish Krishnan pointed out. Ananya Roy says the pessimism was long overdue.

Other columnists, however, have focused on the opportunities. Ajay Bagga quotes Warren Buffett to say we must be greedy when others are fearful. Shyam Sekhar says a sell-off would be the ideal opportunity to lock into companies that we always wanted to own, at decent valuations. As the Pet Shop Boys sang in their 1986 hit ‘Opportunities (Let’s make lots of Money)’:

Oh, there's a lot of opportunities

If you know when to take them

You know there's a lot of opportunities

If there aren't, you can make them

(Make or break them).

Cheers,

Manas Chakravarty

Here are some of the stories and insights we published this week, apart from our technical picks in the equity, forex and commodity prices:

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