AKD Quotidian about — Jan 13 Inflation Preview: DR may decouple from soft CPI readings

Karachi, January 24, 2013 (PPI-OT): AKD Securities expects Jan’13 CPI to clock in at 7.65%YoY, translating into a 1.3%MoM increase which would be significantly higher than the 0.3%MoM CPI average increase in 1HFY13.

According to AKD Securities, this is corroborated by the SPI trend which suggests an uptick in price pressures by a steep 2.2%MoM. The rise in sequential price pressures is expected on the back of increase in 1) food inflation with wheat prices up 9.1%MoM, 2) fuel/energy prices with gas prices up 6.1%MoM/ CNG prices up 21%MoM and 3) increased gov’t borrowing from the SBP. This should lead to 7MFY13 CPI averaging 8.23%YoY, whereas the 12m moving CPI average still stands at 9.5%, inline with the GoP’s FY13 target. Going forward, AKD Securities expects full-year FY13 CPI to average -8.35%YoY, going by an assumed 1.2%MoM incremental increase. That said, with a weakening external a/c profile amidst risks to inflationary pressures going forward, AKD Securities believes that interest rates may have already bottomed. In this regard, even as cut-off yields came off (by 2bps- 9bps) and bids shifted away from the 3m tenor into the 6m tenor in yesterday’s T-bill auction, AKD Securities believes soft CPI readings will largely become sidelined when the next MPS is formulated where AKD Securities expects no change in the DR.

Inflation Outlook: Recent data depicts a notable shift as SPI has started to gain upward momentum (up 2.2%MoM), propelled by an increase in domestic food prices (wheat prices up 9.1%). Taking AKD Securities’ cue from SPI, AKD Securities expects CPI in Jan’13 to increase by 1.2%MoM to 7.65%YoY. This should lead 7MFY13 CR1 to average 8.23%YoY. Note that a potential swing factor could be the quarterly compilation of household rental surveys with the impact to manifest in Jan’13. Assuming a 1.2%MoM increase in CPI going forward, full-year FY13 CR1 will average ~8.35%, still lower than the Discount Rate (9.5%).

Money market on the fence: In yesterdays T-bill auction, an amount of PKR 297.6billion was raised (realized amount) vs. bids of PKR 449.9billion. Cut-off yields came off by 2bps-9bps to 9.09%-9.26%. AKD Securities notes two key insights from yesterday’s auction – 1) bids were concentrated in the 6m tenor indicating the money market’s relative uncertainty over near-term interest rate movement and 2) acceptance of 96% of the bids in the 12m category signalling rate reversals before too long. This is broadly inline with AKD Securities’ view, where AKD Securities expects interest rates to start inching up by mid-2013.

External position holds the key: Even as real interest rates remain in +ve territory and AKD Securities reiterates that full-FY13 CPI is likely to undercut the GoP’s 9.5% target, AKD Securities believes the SBP will now adopt a more cautious stance due to a weakening external position (lower fx reserves amidst IMF talks) and risks to sequential price pressures (imported inflation if PKR weakens, deficit monetization). AKD Securities does not expect any change in the DR come the next MPS with interest rates increases tied to formal re-entry into an IMF program.