US Mortgage Risk Premia has Bottomed
Mortgage risk premia has always bottomed between 3 months to 1 year before equity markets have bottomed, this suggests that US equity markets are bottoming right now or might bottom soon.
A country’s credit impulse is a strong influencer of business cycles and thus directly translates into economic activity and to a certain degree inflation.
For countries that have sizable economies which impact global activity, the credit impulse directly correlates to commodity prices (For eg: China) & performance of financial assets (For eg: US)
In the case of India, the credit impulse has an excellent ability to predict economic activity as well as financial market performance. But beyond that, it has also been useful in predicting the movement of USD-INR exchange rates. An increase in credit impulse is akin to an increase in liquidity which negatively impacts a net importer country’s currency strength and vice versa. This is clearly evident in the case of India, where the credit impulse leads USD-INR changes by 6 to 9 months.
At present, the credit impulse is expected to reduce in 2023 which should lead to a strengthening of INR.
Indian Markets Remain Fairly Valued
Indian markets remain fairly valued as measured against inflation. The elevated levels of interest rates have not weighed on economic activity yet but are likely to show an impact in the second half of the year.
Time to Own Indian Bonds
Inverse Bond Yields & Inflation has a very clear relationship. If one believes inflation is destined to go down within a year's time, owning bonds certainly seems like an ideal choice.
Markets Bottom When PMI Bottom
Equity markets tend to bottom once coincident indicators such as the US ISM PMI Index bottom. Until that is clearly visible limiting equity exposure remains an ideal choice. For now, the drop in PMI is expected to translate into a further drop in Real GDP growth, which is also likely to impact earnings.
Chinese Imports Determine Oil Prices
China being a factory for the world, its raw material imports have a direct effect on commodity prices. Chinese monthly import drives changes in oil prices.
Milton Friedman’s Favorite Plot
Milton Friedman argued that inflation is entirely monetary in nature and the close relationship between CPI & M2/GDP validates this notion. Ideally, the plot of both these terms should trend together in tandem and with the exact same values. Distortions arise due to the incorrect magnitude & delayed actions of central banks that respond to changing economic conditions.