AKD Quotidian about — Soft Oct’12 CPI reading strengthens Case for further easing

Karachi, November 05, 2012 (PPI-OT): Headline CPI has continued its downward trend in Oct’12 and registered at 7.66%YoY/0.38%MoM (taking 4MFY13 CPI to average 8.78%YoY).

According to AKD Securities, this is in line with AKD Securities’ expectation of 7.7%YoY. AKD Securities attributes the soft CPI reading to 1) subdued Food inflation (down, O.2%MoM) particularly perishable food items, 2) decline in transport group (down 1.56%MoM) on the back of tower petroleum and gas prices and 3) encouraging GoP retirement of SBP debt (by PkR216bn FYTD). As a result, AKD Securities trims AKD Securities’ FY13F average CPI forecast to 9.5%YoY in line with the GoP target. Single digit CPI average across FY13, particularly in the near-term, strengthens the case for a continuing monetary easing cycle. With +ve real Interest rates at 0.5% (assuming FY13 CPI of 9.5%), SBP has room to cut the Discount Rate by atleast 50bps in the next MPS in Dec’12. In this regard, latest T-bill yields fell by -40bps to register within the 923%-9.35% range. It is encouraging to note that Core (Trimmed) inflation has been on a downtrend as well and stands at 10%YoY in Oct’12 vs 11.7%YoY in Oct’11 .That said risks to inflationary pressure remains in view of 1) fading out of high base effect, 2) increasing pressure on PkR/US$ parity (depreciation of 1.25%FYTD) due to IMF repayments, 3) potential fiscal indiscipline ahead of general elections and 4) an uptrend in Core (NFNE) inflation. Regarding the tatter it is interesting to note that SBP focuses and targets Core (Trimmed) CPI which encouragingly is on a downward trend.

Oct CPI review: In line with AKD Securities’ expectations Oct’12 CPI clocked in at 7.66%YoY implying a 0.38%MoM increase. This brings 4MFY13 CPI to average at 878%YoY comfortably below the discount rate. While the housing rent and other fuels depicted an uptrend, up 1.32%MoM, based on quarterly surveys, the downward trend in CPI is attributed to 1) subdued Food inflation (down,0.2%MoM) particularly perishable food items, 2) decline in transport group (down1 .56%MoM) on the back of lower petroleum and gas prices and 3) encouraging GoP retirement of SBP debt (by PkR216bn FYTD). However the onus of fiscal burden has shifted on scheduled banks with GoP borrowing from scheduled banks for budgetary support recorded at PkR561bn FYTD, up 202%YoY. Going Forward, AKD Securities expects FY13 CPI to average within the GoP target of 9.5%YoY despite risks to inflationary pressures on the back of 1) BoP risks coming to the forefront, 2) higher global food prices, 3) uptick in oil prices, and 4) weakness in the PkR against the US$ leading to imported inflationary pressures.

KSE crossed the 16k barrier! The KSE closed at its high of 16101 points with the release of Oct’12 CPI reading on Friday, strengthening investor expectations of another DR cut in Dec’12 MPS. While risks remain, AKD Securities believes the SBP may take one last shot at reviving private sector credit offtake and thus cut the DR by at least 50bps in the upcoming MPS. AKD Securities sees obvious benefits for leveraged plays (Textiles and Cements in particular) that are likely to extend their bull run for the next few months. Beyond Dec’12 however, AKD Securities believes the current policy rate cycle is likely to reverse by 2HFY13 with fx reserve erosion and possible re-entrance to a formal IMF program. That said, materialization of foreign inflows (3G auction and bilateral flows) is a key swing factor. In the near term however, momentum plays can outperform including NMLI NCL, DGKC and PTC.

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