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US economy: Another rate cut?

Mar 19, 2001

The wholesale prices in the US rose by just 0.1% in February (month on month). This could be attributed to the fact the growth in January was a 1.1%, one of the highest since 1990s. The jump in January had threatened to discourage the Fed from cutting interest rates. But the February figures have almost ascertained the possibility of a rate cut. Excluding the often volatile food and energy prices, the "core" producer price index (what it actually costs manufacturers to produce goods), fell by 0.3%. The jump in January was due to rising costs for fruits and vegetables, along with rise in prices for cigarettes, cars and energy. The "core" rate had risen by 0.7% January.

Producer Price Index
September 0.9%
October 0.4%
November 0.1%
December 0.2%
January 1.1%
February 0.1%

The rise in wholesale prices in January was accompanied by a fall of 0.3% in industrial production. The figure had fallen by 0.5% in December. Capacity utilization in January had fallen to 80.2% from 80.7% in December. Industrial production for February fell by 0.6%. What is concerning is that capacity utilisation fell to 79.4%, the lowest in nine years.

On the positive front the housing sector continues to hold out against the slowdown. The University of Michigan's twice-monthly barometer of consumer confidence clocked 91.8 for March, slightly higher than expected and better than the 90.6 level reported in February.

When the Fed meets on Tuesday the producer price index and the industrial growth figures should make a strong case for a rate cut. The market expectations are that the rate cut will be by another 50 basis points. The bourses however might not react very positively to this. However, there are expectations of a rare 75 basis point rate cut which might have more of a reversal effect on the sentiment for a short while.

The economic data, along with profit warnings from the corporates especially in the technology sector has taken a toll on the bourses. The NASDAQ is near its a 27 month low. The performance of the NASDAQ sets the attitude towards the technology stocks in the Indian stock markets. A profit warning at NASDAQ has a negative impact towards the technology stocks on the Indian bourses. This is quite interesting because companies like Compaq, Microsoft, Nortel, Cisco that have issued profit warnings are gigantic compared to the Indian technology companies.

(U$ bn)
(U$ bn)
Microsoft (1HFY01) 12 Wipro (FY01E) 0.7
Orcale (9m FY01) 8 Infosys (FY01E) 0.4
Nortel 30 Saytam (FY01E) 0.3
Cisco (1HFY01) 13 Hughes (FY01E) 0.04
Compaq 42    

It seem that the only news that will lift the apprehensions towards the technology stocks will be the US economy coming back in full swing. Considering the conflicting numbers regarding the US economy and the corporate growth it seems the haziness will prevail for sometime to come.

As for the investors shy towards technology stocks the Aetna incident at Infosys should give an indication of the shape of things to come. It just might happen that the Indian technology sector stands to gain due to a US slowdown, thanks to increased out sourcing.

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