Independent Emerging Markets Commentator Geoff Dennis talks about US inflation data that came in at 3.2%
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00:00 Good morning and thanks so much for joining in.
00:01 You're watching BQ Prime.
00:02 My name is Alex Mathew.
00:04 And we're here to talk about possibly the biggest headline of the week so far and certainly
00:08 the biggest headline heading into trade today.
00:11 And that is the fact that US CPI has cooled more than expected.
00:15 CPI stood at 3.2% in the month gone by.
00:19 And that was lower than consensus estimates of 3.3%.
00:24 Has inflation peaked?
00:26 What does this mean for US monetary policy?
00:29 And therefore, what does it mean for global equity markets and our markets here in India?
00:34 To talk about some of that, I'm joined by Geoffrey Dennis, independent emerging markets
00:38 commentator.
00:39 Geoff, thanks so much for taking the time.
00:41 Really appreciate your taking the time.
00:43 Let me start with a question.
00:45 Has inflation peaked?
00:47 And if it has, what are the implications for markets globally?
00:50 Oh, inflation has definitely peaked.
00:53 And I think what was important about the report today was the fact that obviously, as you
00:59 said, it was better than expectations, lower than expectations.
01:03 But also, the year on year rate came crashing down from 3.7 to 3.2, which is almost back
01:09 to the low that it got to in June.
01:12 And so that was a positive surprise.
01:14 And if I can just make this comment about the number, I think today's report was always
01:20 it was it was kind of easy, I think, to predict that it would be a good surprise because energy
01:27 played a huge role.
01:29 But when energy jumps a lot or falls a lot, the inflation rate tends to overshoot.
01:35 We got the benefit of a dramatic fall in energy prices in today's CPI.
01:41 And therefore, I think that's what created, if you like, the backdrop for this big rally.
01:47 Now, I'm sure we're going to talk about this.
01:51 Basically, it gave real additional evidence that the Fed is finished hiking, which is
01:58 now my view for sure.
02:01 I think we're quite a way away, however, from the first rate cut from the Fed.
02:05 But it's the markets that the Fed has done despite Powell's, Fed Chair Powell's comments
02:11 last week, which were quite hawkish.
02:13 And you got a classic risk on reaction equities up, bond yields sharply lower, down below
02:20 four and a half percent and also a weaker dollar, which, as I argue, continuously is
02:27 particularly good for the emerging markets.
02:32 I want to come to two aspects of that.
02:34 Now, ordinarily in any given year, Jeff, 19 basis points fall in a bond yield on the 10
02:43 dollar would be headline, big news.
02:46 But over the last couple of weeks or the last five weeks or so, the kind of volatility that
02:51 we've seen in treasuries has been unprecedented.
02:53 And so therefore, this is par for the course.
02:57 Are we done with some of that, though?
03:00 Does it settle?
03:01 Because as you say, I think a lot of market participants are now pricing in.
03:05 We're done with the rate hike.
03:06 So therefore, we shouldn't see too much of a spike from this point.
03:10 And the second point is the dollar index.
03:13 We saw it come off overnight.
03:14 One hundred and four thereabouts is where it is right now.
03:18 Does it come off more according to you?
03:20 And what are the implications?
03:21 Spell that out for us.
03:22 Well, I'm too old.
03:23 And I remember days, weeks, months of much, much bigger moves than the even the big move
03:31 we had in bonds today.
03:33 But certainly you've had tremendous volatility in bond yields in 2023.
03:38 And that's been unusual compared to the last several years.
03:42 We had a big rally.
03:43 Then it yields from five to four and a half.
03:47 It bounced back a little bit.
03:48 Now they had a big move down.
03:50 I again today, I don't think they're going to go a lot lower in the near term.
03:57 I think they will go lower.
04:00 My own model is telling me that inflation in the US probably hit somewhere near the
04:06 two percent in the second half of next year.
04:09 So that'll bring yields down a little bit more.
04:12 But I'm not sure we're going to see another any more than another 30, 40 basis points
04:17 over the next several months to the downside.
04:20 We've seen a good move already.
04:22 I think that's point number one.
04:24 The other point that I think supports that view is the fact that on a day like today,
04:31 nobody cares about the supply side.
04:32 But the supply side of the US bond market is what really troubled the markets as the
04:38 yields pushed up to five percent recently because the US is running an enormous budget
04:44 deficit.
04:45 And with that, you're getting a big supply of bonds coming onto the market.
04:49 And of course, the Fed is reducing the size of its balance sheet.
04:53 So I think you're still going to worry about the supply side here.
04:56 But for now, today, with this downside surprise in inflation, lower than expected inflation,
05:03 the demand for the bonds was very, very high.
05:06 That's what pushed the yields down very sharply.
05:08 They go lower still.
05:10 I'm not sure they go that much lower, maybe, as I say, 30, 40 basis points over the next
05:15 few weeks and months.
05:16 On the dollar, I've been bearish dollar for a long time and it's not really worked out.
05:22 I think the dollar does go lower.
05:25 As it becomes clear, the Fed is finished tightening and bond yields will go lower and eventually
05:30 the Fed will start to cut rates as well.
05:33 The backdrop here is although growth is good in the US compared to European growth, which
05:37 is not good, which is certainly weakening the euro to a certain extent, the issue with
05:43 the US continues to be, as I said a few moments ago, a very big budget deficit and a very
05:48 big trade deficit.
05:49 And I think that will be the dominant driver of the lower dollar.
05:53 So either the dollar continues to fall, it'll fall erratically, it's had a good move down
05:57 in the last few days, maybe it pauses, but I think dollar euro, which is between 108
06:03 and 109 today, is going to head towards 115 over the next six to 12 months.
06:08 OK, all right.
06:10 So that's important to watch.
06:12 The last leg of this conversation, I'd like to focus on the rate cut scenario.
06:17 I guess the attention starts shifting towards and the bets start pooling about when that
06:23 rate cut takes place.
06:24 Some have said it could be as early as June next year.
06:27 Is that optimistic?
06:29 And obviously, this depends on the US economy, which has stayed quite resilient, Jeff.
06:34 And the wages data, which I was looking at as well, the real wage growth seems to exist.
06:40 It's there.
06:41 Yes, I think the wages are still something you have to watch.
06:45 And that could, they could lead to, you know, some, if you like, slowdown again in the pace
06:51 in which inflation comes down.
06:53 And as your viewers will know very well, we've seen a lot of high profile wage settlements,
06:58 particularly in the auto industry, but also with the Hollywood actors and producers, etc.
07:05 But also earlier in the year with UPS, for example, the parcel delivery service.
07:13 But at the end of the day, I do think that sufficient downside is happening here on inflation
07:20 going forward.
07:21 And wages will stay under control that you can talk about rate cuts down the road.
07:26 Now, there are two reasons why the Fed will cut rates, in my view, probably in the second
07:32 half of 2024.
07:33 Are there two possibilities as to why they cut rates?
07:36 One is we actually go into recession, which I think is now a diminished possibility.
07:41 It is possible, but it's much less likely, I think, than it was a few months ago.
07:47 But if that were to happen, for example, in the first half of next year, they'd cut rates
07:50 then.
07:51 So you've got to watch the economy, see if it doesn't slow down too much.
07:54 And then, of course, in the second half of next year, if inflation is pushing towards
07:58 2 percent and interest rates are still 5.25 to 5.38, I'm sorry, 5.25 to 5.5, forgive me,
08:08 you're going to be in a situation where basically real rates are getting too high.
08:14 And so with the economy doing well, there is no need for the Fed to rush.
08:18 And I think the earliest they're going to move on my numbers would be the second half
08:23 of next year.
08:25 And I think the market could be disappointed because the market, I think, is pricing in
08:30 for rate cuts next year.
08:31 And I just think that's too many.
08:33 OK.
08:34 The last question, and this relates, of course, to the Indian equity markets in the context
08:37 of emerging markets.
08:38 We've seen considerable selling from the equity markets here by foreign institutions.
08:44 Now that this major change in expectation, there was, until this point, I think, until
08:50 yesterday, a question mark about whether or not the Fed had one more hike left.
08:56 Now that that's seemingly out of the way, what happens to flows?
09:00 And how does India stand in the context of emerging markets, Jeff?
09:05 India has outperformed this year.
09:07 It's up about 1.5% in dollars.
09:09 The EM index as of now, as of a very nice move early on on the 15th today, in Asia is
09:17 up about 1.5% on the year.
09:19 A disappointing year, frankly.
09:21 So India is up.
09:22 So although the FII data has not been good lately, India has nevertheless outperformed.
09:30 My sense is that you have had a perfect cocktail here for emerging markets.
09:36 I wrote a piece about three weeks ago saying, what do you need for emerging markets to do
09:41 well?
09:42 Well, you need to, first of all, you need China to turn around.
09:46 And there's some hint that China may be turning.
09:48 I don't so much mean the economy, although that could be turning too, in terms of stronger
09:53 growth, but also the market.
09:55 You need confidence the Fed is at the peak and the 10-year yields are at the peak.
10:01 Thirdly, you need, above all, a weaker dollar.
10:04 And finally, you need some sort of sense that geopolitics is settling down.
10:07 Now, I don't think geopolitics is settling down for sure, especially in the Middle East.
10:12 But the typical way in which geopolitics impacts markets is through something like the price
10:18 of oil, which has been extraordinarily benign.
10:21 So you've got a very, very good mix of events here for the emerging markets.
10:27 The EM does very well into year end and into 2024.
10:31 The FII money comes back.
10:33 And I think India does well as well.
10:35 I'd be overwhelmed.
10:36 India, of course, is expensive.
10:37 But then India is always expensive.
10:39 And I think the growth story is great.
10:42 There's potential down the road, perhaps, for interest rates to be brought down as inflation
10:46 drops.
10:47 But at the end of the day, this is a good environment for EM.
10:51 And that's going to bring the FII money, I think, back to a market like India.
10:54 Fantastic.
10:55 Thank you so much, Jeff, for taking the time.
10:57 Pleasure speaking with you.
10:58 Thank you.
10:59 All right, viewers, there you have it.
11:02 A comprehensive view on everything that you heard overnight on monetary policy, on inflation
11:07 in the US, and of course, the most important factor from our perspective here in India,
11:13 which is flows which could turn back to emerging markets and, of course, to India.
11:18 Do stay tuned.
11:19 Lots more coming up over the course of the day.
11:21 This is BQ Prime.
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