Fed, RBI meeting minutes, US PMI to drive markets

This week US markets would be closed on Monday. Later, during the week both FOMC (Federal Open Market Committee) and RBI (Reserve Bank of India) meeting minutes would be released and would provide insights into the central bank’s future course of action. This apart, US PMI data would be another key data which would be keenly tracked by investors globally. However, after a long time, FIIs turned net buyers for the past week which would provide short term relief to the markets.

Domestic equities continued their lacklustre movement last week amidst mixed global cues and modest earnings report card. Nifty ended the week with minor gains of 88 points (+0.5%), even as broader market reversed its positive trend and ended 1% lower. Banking and Pharma largely dragged the market, while capital goods and IT saw some buying interest. Consistent order inflows are driving capital goods and defence stocks, with some rebound seen in IT sector stocks.

Also Read | Fed's Powell says job strength shows inflation fight may last 'quite a bit of time'

US inflation came in slightly higher at 6.4 per cent vs expectation of 6.2 per cent, which pointed towards stickiness in global inflation. Further the jobless claim data and US retail sales data came in positive which led to hawkish commentaries by some of the Fed officials, renewing fear of aggressive interest rate environment. Even on the domestic front, India’s CPI for January rose to a three-month high at 6.5%, though WPI Inflation fell to 24-month low to 4.7% in January 2023. Persistent inflation globally would continue to create pressure on the central banks to remain hawkish until inflation cools down substantially.

Corporate earnings came to an end where growth was moderated, led by weak demand environment and inflation led margin pressure. It was dragged by commodities while financial and auto sectors held the fort. Nifty earnings growth stood at 11% YoY (v/s est. of +14% YoY) but excluding commodities, it grew solid 31% YoY (v/s expectations of +26% YoY). Broad-based slowdown in consumption, both staples and discretionary, also hit corporate earnings. We now expect 12% earnings growth for FY23.

Slowdown in consumption is a big concern and if it persists, it will result in big earnings downgrade. Currently markets are trading range bound and valuations are in fair zone with Nifty trading at ~18x FY24 P/E. Thus, there is room for modest upside but only if corporate earnings do not see material downgrades ahead. In the near term, we expect defence, capital goods and auto sector stocks to do well on back of strong Q3FY23 results and healthy order book.

(The writer is Head–Retail Research, Motilal Oswal Financial Services Ltd)