When Will Federal Reserve Raise Interest Rates? - vrk100 - 12Sep2021

When Will Federal Reserve Raise Interest Rates?  

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(please check Updated blog 25Feb2023)

 

 

Since February of 2021, financial markets have been expecting a rise in US interest rates. In reaction to this, the US 10-year Treasury yield rose from 1.20 per cent to 1.75 per cent by March 2021, before cooling off to 1.34 per cent by last Friday (see graph below).

For the past two months, the US Federal Reserve has been hinting at tapering of its bond purchases, without giving any definitive timeline to the tapering. The Fed has also hinted at raising interest rates by the end of 2022 or by start of 2023.

Past Rate Hike Cycles

Since 1999, there were three rising rate cycles from the US Federal Reserve:

First: Fed Chair Alan Greenspan started raising federal funds rate from 4.75 per cent in Jun1999 to 6.50 per cent in May2000 (175 basis points increase in 11 months). The first rising rate cycle coincided with the DotCom Bubble.

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Read more:  

Fed Tapering is Postponed

Why is US inflation low? 04Oct2013

Decoding the US Government Shutdown 27Sep2013

Why did US Fed raise discount rate? 20Feb2010

US Fed rate cut and its impact on financial markets 17Dec2008

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Second: Greenspan started raising fed funds rate from 1.00 per cent in Jun2004; followed by Bernanke till 5.25 per cent in Jun2006 (425 bp increase in 24 months). The second cycle coincided partially with booming stock markets globally.

Third: Fed chair Janet Yellen started hiking fed funds rate from 0.00-0.25 per cent range in Dec2015; followed by Jerome Powell till 2.25-2.50 per cent range in Dec2018 (up by 225 bp in 36 months). For seven years between Dec2008 and Dec2015, Fed funds rate remained steady at nearly zero bound (that is, 0.00-0.25 per cent) without a single change.

You can check the images below for a detailed timeline of Federal Funds rate (fed rate) revisions. 

Economic indicators

The US CPI (consumer price inflation) is above two per cent since March of this year. For the month of July 2021, its print is at 5.4 per cent (graph below), the highest since July 2008.

PCE or personal consumption expenditure inflation, a measure closely tracked by the Fed, is 4.20 per cent for July 2021. 

The US unemployment rate is 5.2 per cent for August 2021. It fell from all-time high level of 14.8 per cent reached in April 2020. 

The unemployment rate needs to be interpreted in the context of falling labor force participation rate since 2000. The labor force participation rate is 61.7 per cent for August 2021. It fell from a high level of 67.3 per cent attained in January 2000 (graph below).

Non-farm payroll employment rose by 235,000 in August 2021, much below the Bloomberg survey of 725,000. 

Many experts have been criticizing the Fed for not initiating the bond tapering even though many economic indicators have been showing signs of good recovery.

The data, however, indicate that there is still considerable slack in the US labor market. Given the levels of unemployment rate, labor force participation rate, PCE inflation, high levels of commodity prices, and other indicators, the Fed may start tapering its bond purchases by the start of 2022.

But when it comes to interest rate rise, what the Fed will do I've no clue. The future interest rate trajectory depends on incoming data. My guess is the next rate cycle may start somewhere in 2023.

 Graph 1 - CPI inflation rate:

 

Graph 2 - US 10-year Treasury yield:

 

Graph 3 and 4 - US Fed Funds rate revisions from Jan2006 till now:

Graph 5 - US labor force participation rate:

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P.S.: The Federal Open Market Committee (FOMC) at its meeting on 01Feb2023 decided to raise federal funds rate by 25 basis points to 4.50-4.75 per cent > 

 

 

 

P.S.: The Federal Open Market Committee (FOMC) at its meeting on 14Dec2022 decided to raise federal funds rate by 50 basis points to 4.25-4.50 per cent > 

 

 

P.S.: The Federal Open Market Committee (FOMC) at its meeting on 02Nov2022 decided to raise federal funds rate by 75 basis points to 3.75-4.00 per cent > 

 

P.S.: The Federal Open Market Committee (FOMC) at its meeting on 21Sep2022 decided to raise federal funds rate by 75 basis points to 3.00-3.25 per cent > 

 

 

P.S.: The Federal Open Market Committee (FOMC) in its meeting on 27Jul2022 decided to raise federal funds rate by 75 basis points to 2.25-2.50 per cent >

P.S.: The Federal Open Market Committee (FOMC) in its meeting on 15Jun2022 decided to raise federal funds rate by 75 basis points to 1.50-1.75 per cent > 

 

P.S.: The Federal Open Market Committee (FOMC) in its meeting on 04May2022 decided to raise federal funds rate by 50 basis points to 0.75-1.00 per cent > 

 

 

P.S.: The Federal Open Market Committee (FOMC) in its meeting on 16Mar2022 decided to raise federal funds rate by 25 basis points to 0.25-0.50 per cent >

 

References:

Fed funds rate - historical; FOMC open market operations

Fred data - US unemployment rate 

Fred data - US unemployment level

Fred data - US labor force participation rate 

Fred data - US 10-year treasury yield Fred data - US CPI inflation rate (edit it with option 'percent change from year ago') 

US CPI inflation rate historical 1914 till now

Fred data - US PCE inflation rate (edit it with option 'percent change from year ago') 

Fred data - US PCE inflation rate and Core PCE inflation

 

NY Fed data - US economy in a snapshot - PDF for Sep2021 

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

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Twitter @vrk100

India First Quarter GDP Growth of FY 2021-22 - vrk100 - 02Sep2021

India First Quarter GDP Growth of FY 2021-22 

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A few days ago, Indian government announced GDP (gross domestic product or annual income) estimates for the first quarter of financial year 2021-22. The real GDP (at constant prices) for the first quarter is Rs 32.38 lakh crore, showing a growth of 20.1 per cent as compared to the first quarter of FY 2020-21.

It may be noted that the real GDP in Q1 of FY 2020-21 contracted by 24.4 per cent due to severe lockdown imposed by the Modi government after the COVID-19 outbreak. 

Table 1 - Real GDP (click on the image for a better view):

As shown in the table 1 above, the first quarter GDP for FY 2021-22 is still below the real GDP number of Rs 35.67 lakh crore in Q1 of FY 2019-20.

The COVID-19 pandemic has severely hit services sector during the Apr-Jun 2021 quarter also, though agriculture and manufacturing sectors have done reasonably.

Table 2 - GDP at current prices (click on the image for a better view): 

 

As shown in table 2 above, the first quarter GDP for FY 2021-22 at current prices is Rs 51.23 lakh crore, showing a growth of 31.7 per cent versus the first quarter of FY 2020-21.

It is expected the economic recovery will continue for the next two quarters with expectations of a 9 to 10 per cent real GDP growth for the fully year of 2021-22.

Note: India's financial year starts from April to March of every year.

Reference: MOSPI press note dated 31Aug2021

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

Kaveri Seed Company - Buyback Offer 2021

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(This is just for information purpose only. This should not be construed as a recommendation. Please consult your financial adviser before taking any action.)

 

(For the 2022 buyback offer, please check here) 

 

Kaveri Seed Company Limited on 17Aug2021 announced, through a BSE stock exchange filing, that its board of directors would meet on 25Aug2021 to consider a proposal to buyback the company's shares. The following are the details / timeline of the buyback offer:

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Read more: Fed Tapering is Postponed

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1. BSE filing dated 17Aug2021 announced that the Company's Board would meet for a buyback proposal (the BSE announcement came after closure of market hours -- end-17Aug2021, the company's market price was Rs 577 per share with a market cap of Rs 3,480 crore).

2. Board would meet on 25Aug2021 for, inter alia, considering the above buyback offer.

3. On 18Aug2021, the stock opened at Rs 605 per share, touched an intra-day high of Rs 623 before closing for the day at Rs 583 (market cap Rs 3,517 crore).

4. This will be the fourth buyback by the company in the past four years. The previous three buyback offers were in 2019, 2018 and 2017 with ex-dates of 21Nov2019, 02Aug2018 and 15Jun2017 respectively.

5. 2019 buyback details: (post buyback) Tender offer of 28 lakh shares at a buyback price of Rs 700 per share -- company bought back 28 lakh shares at Rs 700 with a total of Rs 196 crore -- offer closed on 13Jan2020 -- promoters participated in the buyback by tendering 12,82,578 shares. Weblink for Letter of offer is here.

6. 2018 buyback details: (post buyback) Tender offer of 29.63 lakh shares at a buyback price of Rs 675 per share -- company bought back 29.63 lakh shares at Rs 675 with a total of Rs 200 crore -- offer closed on 07Sep2018 -- promoters participated in the buyback by tendering 14,30,245 shares. Weblink for Letter of offer is here.

7. 2017 buyback details: (post buyback) Tender offer of 29.63 lakh shares at a buyback price of Rs 675 per share -- company bought back 29.63 lakh shares at Rs 675 with a total of Rs 200 crore -- offer closed on 21Jul2017 -- promoters participated in the buyback by tendering 13,74,934 shares. Weblink for Letter of offer is here.

(more details will be added as when more events are announced) 

Update 21Aug2021

8. On 20Aug2021, the stock price of Kaveri Seed weakened to Rs 564 (market cap Rs 3,400 crore) despite the buyback proposal from the company. The price pressure suffered by mid- and small-cap stocks in Indian stock market in the past two weeks seemed to have negatively impacted Company's stock price.

While deciding on the buyback price, companies consider various factors, such as, market price trends on stock exchanges, company's net worth, impact of buyback on company's financials and price-earning ratio.

A perusal of the Kaveri Seed's previous letters of offer during 2017, 2018 and 2019 indicate that the company's buyback price represented a premium over current market price (the date of intimation of Board meeting for buyback proposal); a premium over the average of the two-week value-weighted average price (VWAP) on stock exchanges prior to the date of intimation; a premium over the average of 3-month VWAP and a premium over the average of 6-month VWAP.

The premium, in general, was between 30 and 50 per cent. 

The relevant date for us in calculating the likely buyback price is 17Aug2021, the day the Company informed the stock exchanges of its decision for a Board meeting (on 25Aug2021) to consider the buyback of shares.

On the relevant date (17Aug2021), the price data are as follows:

a) Current market price is Rs 577

b) Two-week average of daily VWAP, prior to the relevant date, is Rs 704 on NSE stock exchange

c) Three-month average daily VWAP, prior to the relevant date, is Rs 724 on NSE

d) Six-month average daily VWAP, prior to the relevant date, is Rs 644 on NSE

Going by these base rates, one could surmise that the Board is likely to fix the buyback price between Rs 700 and 800. It may be repeated that the previous buyback prices were Rs 675 (2017), Rs 675 (2018) and Rs 700 (2019).

In my opinion, the buyback price to be decided by the Company's Board on 25Aug2021, in all likelihood, will be above Rs 700. Overall, the current market price of Rs 564 (end-20Aug2021) appears to be below its intrinsic value, though the first quarter (Apr-Jun2021) results were below par due to supply chain issues faced by the Company.

However, our opinions are subordinate to markets. As such, let us wait and see what the Board will decide about the buyback price. Considering the previous three offers, this offer too is likely to be through 'tender offer,' and not via buyback mechanism by purchases via stock exchanges.

Update 25Aug2021

9. On 25Aug2021, the company announced (during market hours) the Board's decision (BSE filing dt 25Aug2021) to approve buyback of equity shares for a total amount of nearly Rs 120 crore with a maximum buyback price of Rs 850 per share. 

The total amount to be spent on buyback this time is 40 per cent below the size of previous buyback. The stock reacted mildly to the buyback announcement. The stock price on 25Aug2021 closed at Rs 579, with a market cap of Rs 3,492 crore.

Contrary to my expectations, the buyback route chosen by the Board this time is through the 'open market via the stock exchanges' mechanism--and not 'tender offer' as was the case in 2017, 2018 and 2019. 

As the buyback route is through 'open market via the stock exchanges,' the promoters cannot participate in the buyback as per SEBI norms. Based on the maximum buyback price of Rs 850, the company is likely to buy back a maximum of 14,11,780 shares--representing 2.34 per cent of the paid-up capital of the company as on 31Mar2021.

More details are available in the Board resolution (BSE filing dated 25Aug2021). The starting and closing date of buyback will be announced later.

As the company will be buying back shares from the stock exchanges directly, investors need not do anything. It may be mentioned that in the case of 'tender offer' route, investors need to surrender their shares to the company and simultaneously they will receive the amount of buyback. 

Update 07Sep2021 

10. On 27Aug2021, Kaveri Seed Co made a public announcement stating that the buyback period starts from 02Sep2021 and ends on 01Mar2022 (subject to certain conditions). 

Details of daily back are available here and cumulative details are here. The stock price closed at Rs 601 on 07Sep2021, with a market cap of Rs 3,624 crore.

Update 11Oct2021 

11. The company on 11Oct2021 announced closure of its buyback programme. During the buyback programme between 02Sep2021 and 06Oct2021, the company bought back 20,07,473 shares worth about Rs 120 crore at an average price of Rs 597.50 per share.  

After the buyback, the promoter's share capital has increased to 57.44 per cent versus prior figure of 55.52 per cent.

It's no surprise that the company's share price declined in the past one month as the closure was coming to an end. As the details of buyback of shares are available on a daily basis on the stock exchanges, market knew in advance, about the end of buyback programme, well before today's official announcement by the company.

The current market price of Kaveri Seed Company is Rs 558 with a market cap of Rs 3,365 crore (end 11Oct2021). It's interesting to note that the company's share price was Rs 577 (with a market cap Rs 3,480 crore; see para 1 above) when the buyback proposal announcement was first made on 17Aug2021--losing 3.3 per cent of its value since the buyback announcement.

As on date, the price-to-earnings ratio is 16, price-to-book ratio 2.7 and price-to-sales ratio is 3.6. The 52-week high is Rs 816 (17May2021) and 52-week low is Rs 463 (02Nov2020).

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

India CPI Inflation versus WPI Inflation - vrk100 - 15Aug2021

India CPI Inflation versus WPI Inflation 

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Compare Consumer Price Index (CPI) and Wholesale Price Index (WPI): 

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Read more: Fed Tapering is Postponed

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(please click on the chart for a better view)

 

Inflation numbers in India have been elevated for more than a year. In the last one year, CPI inflation registered a high of 7.6 per cent in October 2020, before cooling off to 5.6 per cent in July 2021. 

 

Similar to  CPI Inflation, WPI inflation too has been rising in recent months. It reached a peak of 12.9 per cent in June 2021, before falling slightly to 12.1 per cent last month.

 

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Read more:

Indian savers and negative real interest rates 05Aug2021 

Why worry about negative interest rates 14Jul2020

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As shown in the WPI inflation chart, manufacturers in India seemed to have attained some pricing power since the beginning of 2021. This pricing power is reflected in the steep rise in WPI in recent months. Sectors, like, metals and chemicals have gained pricing power which increased their profit pools hugely in recent  quarters.

As described in the comparison chart above, there are slight differences between the weights (basket of goods and services) of CPI and WPI. CPI inflation numbers are more relevant to households and corporates. Prior to April 2014, India's central bank Reserve Bank of India (RBI) used WPI inflation as a nominal anchor for setting its monetary policy.

But from April 2014, RBI started using new CPI (combined) inflation as a key measure of its monetary policy. RBI adopted this inflation rate as the nominal anchor as part of the Urjit Patel Committee Report of January 2014. 

CPI inflation closely reflects the cost of living for households. It also impacts inflationary expectations in the economy.

Even though RBI's monetary policy moved to Flexible Inflation Targeting (FIT) regime effective June 2016, RBI has failed to control inflationary expectations in India with the key measure of its monetary policy CPI inflation staying persistently above the upper bound (6 per cent) of its inflation target.

It may be mentioned that RBI signed an agreement called Monetary Policy Framework (MPF) with the Ministry of Finance, Government of India on February 20, 2015 whereby RBI was obligated to ensure that CPI inflation remained in the range of 2 to 6 per cent.

As the CPI inflation has been persistently above its outer range of 6 per cent (in 13 out of 20 months since December 2019), it is hoped that RBI will soon get a grip on the primary objective of its monetary policy, that is, anchoring inflationary expectations within the target range of 2 to 6 per cent.

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References:

Flexible Inflation Targeting - RBI report dated 25Nov2016

CPI inflation - Trading Economics

WPI inflation - TE

Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

CFA Badge

 

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100 

Real (Inflation-adjusted) Sensex From 1990 to 2021 - vrk100 - 14Aug2021

Real (Inflation-adjusted) Sensex From 1990 to 2021 

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(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

 

(An updated blog dated 14Mar2024 is available here)

 

(please find three updated charts of real Sensex as on 31Mar2022 at the end of this article)

Today's media headlines are awash with the news of Sensex reaching a record high. BSE Sensex closed yesterday at 55,437, posting a gain of 16 per cent since the start of this year. Indian equity investors have been more than happy with the gains they have made this year and last year despite the COVID-19 pandemic hitting the real economy severely in 2020.

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Read more: Fed Tapering is Postponed

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Indian economy underwent a huge change with the Indian government undertaking several economic reforms in the 1990s. The economic reforms have benefited all sections of the society, though several imbalances remain even today. 

 

In fact, reforms are a continuum. It's pointless to precisely give a starting point for any reforms. One could also argue it was the then finance minister VP Singh who started some clean-up in the mid-1980s. Anyway, it's a different story. 

The stock indices partly reflect the progress we've made in the past three decades. So, let us see how Sensex has done after the reforms started. Between 1990 and now, Sensex moved from 800 at the end of March 1990 to 55,400 now, rising by 70 times in 31 years. The annual average (CAGR) growth in Sensex since 1990 till now works out to 14.60 per cent, which is quite impressive.

 

Inflation adjustment

But this is not the time to be jumping for joy. Because, if you adjust the Sensex returns for the rising prices, you'll have a surprise awaiting for you. Actually, this is the time for deflation--I mean deflating this infectious enthusiasm.

What the media headlines don't tell you is the fact that inflation is a perennial problem in India. India has seen three high inflation episodes in the past three decades. The first one lasted from 1990 to 1999; the second one lasted from 2008 to 2015 and the third one started in December 2019 and continues still. 

Though the magnitude of the three episodes differs, consumer prices have impacted the purchasing power of Indians very badly in the past three decades. Please check the the table below to figure out how severe inflation has been all these years:

 

As can be seen from above table, the average annual inflation between 1990 and 1999 was 10 per cent. And between 2008 and 2015, the average annual inflation was around 9 per cent. In the third episode that started in December 2019 and continuing unabated still, the average annual inflation is more 6.20 per cent.

 

Now coming to the key point of this article, we need to adjust the Sensex numbers with the inflation numbers. The average inflation (CPI is considered here) is 7.34 per cent in the past 31 years--which means one rupee is worth only 11 paise today after 31 years. To put differently, consumer prices in India have risen by 9.2 times. 

 

These are official numbers. As everyone knows, actual inflation we suffer on a daily basis is much higher, even though price rise affects different segments of the population differently.

 

Real Sensex

As described above, Indian stock market players have been happy with average yearly return of 15 per cent since 1990. But most of them have no freaking idea about how inflation has eaten away their returns. 

 

The following is a table showing the Sensex in nominal terms (nominal Sensex) and Sensex in real terms (real Sensex). Real Sensex is Sensex adjusted for inflation numbers:

 (please check below graph, with yellow backdrop, for latest real Sensex)

As you can see from above (middle column), Sensex moved from 800 in 1990 to 55,400 now--which means it has gone up by 70 times in the past 30 years and odd. Now you check the extreme right column which shows the real (inflation-adjusted) Sensex. Real Sensex moved from 800 to 6,050--going up by 7.7 times only during the same period.

 

Against the CAGR of 14.60 per cent for Sensex in nominal terms, real Sensex has delivered a return of only 6.76 per cent. No doubt, considering the real returns generated in other countries, Sensex has done well--even in real (inflation-adjusted) terms. To sum up, this is how Sensex, real Sensex and inflation are stacked up during this period:

 

As you know, inflation is a silent tax shrinking our wallets constantly. So, next time someone tells you that she has made a return of 15 or 20 per cent, please ask for the real return, not the nominal returns.

 

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Abbreviations used:

BSE - BSE Limited, formerly known as Bombay Stock Exchange

CAGR - compounded annual growth rate 

CPI - consumer price inflation

P.S.: The following information is added for information purpose after the above blog was published on 14Aug2021: 

Update with new data on 31Mar2022: Sensex is not 60,000 but just 6,300! 

Table 1: Real Sensex

Table 2: CPI inflation from 1990 to 2022 

Table 3: Sensex / Real Sensex growth in 32 years

Update with new data on 25Sep2021: Sensex is not 60,000 but just 6,600!

Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

CFA Charter credentials  - CFA Member Profile

CFA Badge

 

He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100   

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