LAHORE - The annual inflation rate for June 2016 is likely to clock in at 3.5 percent compared to 3.2 percent and average 2.8 percent in May 2016 and 11MFY16, respectively.

On MoM (month on month) basis, CPI is expected to post an uptick of 0.9 percent MoM compared to 0.2 percent MoM in May 2016 and +0.6 percent in June 2015. The rebound in inflationary trend can primarily be attributed to a seasonal increase (in prices) amid Ramzan in the food and related items (particularly fruits and vegetables) by 2.1 percent MoM having weight of 34.8 percent in CPI. On the flip side, unchanged petrol and diesel prices will likely keep change in transport basket muted, thus, containing upside in CPI. To note, average WoW change in SPI till Jun 23 216 stood at +0.3 percent compared to average 0.1 percent in the preceding month. Cumulatively, average CPI in FY16 is expected to clock in at 2.9 percent YoY compared to 4.5 percent YoY last year largely due to favorable base impact.

In its latest monetary policy statement (MPS), the State Bank of Pakistan (SBP) surprised the market on the downside with 25bps cut in policy rate. Despite the aforesaid cut, average real interest rate continues to hold above +200bps in 4QFY16. Going forward, experts foresee gradual recovery in commodity prices, possible depreciation in PKR/USD and conclusion of favorable base impact to likely put upward pressure on CPI in FY17.

Nevertheless, experts expect SBP to keep interest rates unchanged at current level till Sep’16.

However, with CPI expected to creep up to 5.0 percent mark by Dec’16 (contracting real interest rates below 1.0 percent), experts foresee interest rate cycle reversal to possibly start from Nov’16 MPS. On the contrary, delay in the recovery of international commodity prices and contained uptick in CPI at home following the Brexit episode may enable SBP to postpone the increase in interest rate.

June 2016 maintained a mixed trend for PSX as the benchmark index peaked to 38.8k points (up 7.5 percent MTD) on Jun17’16 owing to the excitement surrounding much awaited reclassification into MSCI EM.

 However, dampened sentiment following the Brexit situation trimmed the gains to +4.8 percent MTD. Experts expect long term direction of the market to remain positive owing to improving macros and steady corporate fundamentals. Moreover, a strong top-down story and inverse relationship of economy with commodity prices will likely keep Pakistan relatively immune from global shocks where any downtrend in the index will remain short lived.