The week ahead in numbers: Govt’s H1 fiscal data, factory output, HUL Q2 earnings

Earnings by major US technology firms will be watched for Artificial Intelligence-related developments and pressures, which could have ripple effects on India. After hiking rates in September, both the US Federal Reserve and Bank of Japan are expected to stay put, but inflationary pressures keep future rate hikes in the bag. Half-year trendAmid elevated crude oil and fertilizer prices, the government's fiscal accounts are facing pressure this year.

The data, which will be released later this week for April-September, will be watched for the assessment of the government’s fiscal position in the first half of the year. Until August, the government's fiscal deficit already stood at 41.9% of the budget estimate—higher than H1 trends in the last few years. The fiscal expansion until August came from a strong 18.2% year-on-year rise in capital expenditure, while an 8.2% increase in revenue expenditure also added pressure.

At the same time, revenue collections grew only 3.3%. This trend is expected to continue in September, with additional subsidy requirements on fuel and fertilizer fronts adding future pressures. According to Icra, the government is expected to overshoot the full-year fiscal deficit target of ₹16.96 trillion by ₹1.3-1.4 trillion. The government will release the September industrial output data on 28 October, which will capture the industrial activity going into the festive season.

Economists expect strong momentum in industrial activity to continue though growth may moderate from August’s 8% year-on-year growth due to base effect turning unfavourable. While industrial activity had benefitted from strong anticipation of demand from goods and services tax (GST) cuts last year, factories this year are operating under increased price pressure and potential softening of demand. However, the breadth of strong growth in the manufacturing segment is expected to provide support.

Of the 23 manufacturing industry groups, 18 recorded year-on-year annual growth in August. Electrical equipment, computers and electronics, motor vehicles, and rubber and plastic products posted some of the strongest increases. While strong growth may have continued in September, elevated input costs, higher interest rates and weaker global demand are expected to weigh on activity in the second half of the year.

Hindustan Unilever’s Q2 results will come against the backdrop of rising input costs, with the company having flagged a 2-5% sequential increase in input-cost inflation for the September quarter. In Q1, HUL raised prices by about 5% but passed on only half of the cost inflation to consumers, while its core operating margin narrowed 40 basis points year on year to 22.8%. Commodity prices remained elevated through Q2.

The World Bank commodity data shows average crude oil prices were 71.7% higher year-on-year in September, while palm oil prices rose 13.8%. Both commodities feed into HUL’s cost base, through soap ingredients and crude-linked chemicals and packaging materials. The rise in crude prices towards the end of the quarter could add further to costs, although the impact will depend on procurement and inventory cycles.

Investors will focus on HUL’s outlook on how the company is looking to protect its margins amid inflationary pressures without weighing much on volumes in a price-sensitive consumer market. The US Federal Reserve and the Bank of Japan are expected to hold interest rates at their October meetings, after having hiked rates last month. However, persistent inflation will keep the prospect of further hikes alive in the coming months.

US headline inflation stood at 3.7% in September, above the Fed’s 2% target, while Japan’s core inflation rose to 2.1%, exceeding the BOJ’s target for the first time in nine months. Rising oil prices linked to the West Asia conflict are adding to inflationary concerns. Bond markets are also reflecting these risks: the US 10-year Treasury yield rebounded to nearly 5% on 23 October, while Japan’s 10-year government bond yield remained elevated around 3%.

Higher yields raise borrowing costs for businesses and households, while increasing the discount rate investors apply to future corporate earnings. The central banks’ guidance will therefore matter for bond yields, currency movements and global equity valuations, beyond the immediate rate decisions. Quarterly results from Microsoft and Cognizant on 28 and 29 October will offer Indian IT investors a read on global technology spending and demand for IT services.

Microsoft’s Azure growth and AI-related capital expenditure will indicate the strength of cloud demand and the scale of infrastructure investment, while Cognizant’s revenue growth, deal bookings and guidance will provide a closer measure of client spending on IT services. While analysts expect strong revenue growth for Microsoft, driven by AI Azure, with eyes also on margins amid aggressive infrastructure spending, Cognizant could post modest growth amid cautious IT spending.

These earnings, in particular, matter for India’s IT companies as they heavily operate as services partners to the global tech giants. The Nifty IT index often reacts sharply to these earnings. For example, when Microsoft flagged data-centre capacity constraints and Meta Platforms warned of higher AI infrastructure costs in October 2024, the IT index fell over 3%.