inflation | Stock markets: how to read macro data to decipher market movements

Nearly 100 macro data points are released each month. Their frequency of publication and the period of data entry vary. For example, inflation data released in March will show actual inflation for February, but Industrial Production Index (IPI) data released on the same date will show actual data for January. The data seems authoritative and is either ignored or overemphasized. This almost always raises a question: will this change the markets tomorrow? Before answering the question, here is how we read and understand the data.

Let’s go back to basics for a moment: GDP=C+G+I+X, where C is private consumption (remember the restaurant where you dined last weekend? Yes, that counts); G is government spending (literally everything that states and central governments spend, from salaries to winery); I is investments (both private and public, like the house you build or the road the government builds in front of your house); and X is the net exports (the brand name Scotch you imported minus the linens your neighborhood textile merchant exported).

This framework is the most amateur and experienced way to understand economics. Simply group these 100+ indicators into these 4 categories and then think in depth.

Despite looking at quantitative data, your insights can be very qualitative. The same data can mean different things to you and me, and that’s okay. There is no doubt that economists are cynical. For example, credit growth may excite one person, but another person may dismiss the trend by saying, “well, it’s only being driven by small and medium industries, which have disproportionate advantages at this point”; or someone might worry about high inflation, but another person might pass it up because more than 70% of it reflects a slight rise in, say, commodity prices.

In short, it is acceptable to interpret the same data differently. It’s what makes us human.

However, as a general rule, one should think about the growth of this month compared to the growth of the last 12 months; unpleasant base effects and all known one-time effects. Now let’s start grouping the indicators:

Consumption/private demand:
Private consumption currently accounts for 60% of our GDP. Any indicator that sheds light on consumption and demand will fall into this category. So let’s start with consumer sentiment (how consumers view sentiment in the economy and what their levels of optimism/pessimism are); personal loans (how much credit these consumers take) and automobile sales (two-wheelers and passenger vehicles – the most expensive consumer discretionary items). Other demand indicators such as non-Pol imports (oil, oils and lubricants), which show how domestic demand is changing; retail price inflation (although it can be supply or demand driven) and total retail payments made in the economy also help in understanding the state of consumption in the economy.

Investments: Investments represent about 30% of our GDP. Several indicators such as OBICUS (survey on the use of capabilities by the Reserve

: usually when capacity utilization is over 70%, investments start ); industrial credit (apart from working capital leverage, most leverage goes to asset creation), steel/cement/coal production, etc. highlights the industry’s needs for asset purchases or investments. Household investments such as real estate and government capital expenditures also fall into this category.

Government consumption: This category adds 12% to the country’s production. It is also probably the most talked about component. We measure it monthly by looking at government revenue sources such as GST, e-transportation bills (which are a primary indicator of GST), monthly tax collections, and monthly expenses. These numbers give a first indication of the fiscal trajectory and the chances of any fiscal surprises. Usually, it makes sense to compare the percentage spent this year with the percentage spent last year for each of these items. An overall picture of public finances is essential for understanding the economy and the dynamics of the bond market.

Net exports: On a monthly basis, the trade deficit and a lot of information derived from it – including the oil deficit, exports/imports of major commodities – help to understand the situation from an external perspective. It also helps to quantify the effect of many stories. For example, slowing global growth will intuitively have a negative impact on exports (is India gaining or gaining market share elsewhere?). Similarly, the impact of export promotion programs can be measured by looking at foreign trade figures.

Finally, we look at flows into the Indian economy (or rather markets) such as foreign institutional investment in debt and equity, foreign direct investment, external commercial borrowing and more to understand the overall complexion of the balance of payments. That kind of completes our list of what matters for the economy.

To the million-dollar investor question, will markets move with it, the short answer is no: markets operate on expectations, not data releases. Understanding data helps build expectations better, which in turn sharpens investing skills. After all, a perspective on history is essential to understanding the future.

(The author, Ankita Pathak, handles products and macro at DSP MF. Views are her own)

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