LAHORE - Following the Asian stocks, the Karachi stock market started the week on a dismal note, however, Securities and Exchange Commission of Pakistan’s (SECP) clarification over brokers’ investigations and lower than expected inflation announcement landed support to the market in later parts of the week. As a result, local bourse closed at 32,970 points (up 0.4 per cent WoW).

Average daily volumes surged 43 per cent to 178 million shares while traded value increased by 41 per cent to Rs8b/$76 million. During the outgoing week, banks and local mutual funds were major net sellers of $2.0 million and US$0.5 million, respectively, while foreigners were net buyers of $0.2 million.

Support services and tobacco sectors were major gainers during the week, increasing by 11.1 percent and 7.3 percent, respectively. On the hand, electronic & electrical goods and real estate investment & services were major losers, down 4.8 percent and 3.1 percent, respectively. Govt announced auction calendar for 3Q2015. It has set a borrowing target of Rs1,250b from T-Bills (Rs1,100b) and PIBs (Rs150bn), largely in line with historical average. On Sep 25, 2015, Pakistan issued a Eurobond worth $500 million with a maturity of 10 years. Coupon rate was 8.25 percent equal to the rate at which it issued similar bonds last year. Amount raised was lower than initial target of $1b while coupon rate was higher than estimate of 7.5-8.0 percent (as prevailing yield is 7.25 percent on 2024 issue). Large Scale Manufacturing Index (LSM) in Jul 2015 increased by 4.7 percent YoY as compared to a decline of 0.5 percent in Jul 2014. Automobile index with a weight of 4.6 percent in LSM grew by 53 percent, whereas, fertilizer and chemical indices were up 19 percent and 15 percent, respectively. Experts anticipate LSM growth to increase to 5 percent in FY16 versus 3 percent in FY15 due to macroeconomic recovery and improving energy situation. Pakistan Bureau of Statistics (PBS) announced multi-year low inflation of 1.3 percent for Sep 2015. For FY16, experts anticipate inflation to remain in the range of 4.5-5 percent, significantly lower than the Govt.’s target of 8 percent. In T-Bill auction held during the week, govt raised Rs53.8b against the target of Rs125bn. Cut-off yields for 3-month and 6-month T-Bills remained flat at 6.48 percent in line with secondary market yields and our estimates. Bids for 12-month and T-Bills were rejected.

According to experts, CPI inflation continued to surprise with September 2015 numbers clocking-in at 1.32 percent YoY (-0.10 percent MoM) vis-à-vis 1.79 percent YoY (+0.31 percent MoM) recorded in August 2015, outperforming market consensus of 1.6-1.8 percent YoY. Lower-than-expected inflation can be attributed to decline in food inflation (-0.1 percent YoY vs. 0.4 percent YoY recorded in Aug-15) as decline of 0.56 percent MoM was observed in perishable food items. Core Non-Food-Non-Energy (NFNE) inflation also decelerated, but at a slower pace to 3.4 percent YoY (+0.1 percent MoM) during the month against 4.0 percent YoY (+0.1 percent MoM) recorded in August 2015. With multi-year inflation recorded during the month, FY16TD average inflation now stands at 1.64 percent YoY against 7.5 percent YoY recorded in the corresponding period last year.

The impact of gas and fertilizer price hike announced during the month was more than offset by decline in prices of POL products and transport group, which reflects spillover benefits of depressed crude oil prices (Brent Crude nosedived by 22.3 percent in FY16TD). To recall, govt increased gas prices by up to 67 percent at the start of September 2015 and a major fertilizer manufacturer increased prices of its Urea by around 7 percent in response to this price. Nevertheless, these price hikes were more than offset by decline in non-perishable food items (-0.18 percent MoM), motor fuel index (-3.76 percent MoM), diesel oil (-4.38 percent MoM) and furnace oil index (-15.57 percent MoM).

Low CPI numbers may incite expectations of further cut in policy rate in November 2015 but experts believe that the further cut is not possible in the backdrop of PKR depreciation and shaky fiscal position of the government. Moreover, as effect of low base starts to kick-in during 2HFY16, they expect inflation to jump going forward and expect it to average in the range of 6-6.5 percent during FY16. In this backdrop, further monetary easing is likely to be out of proportion in upcoming monetary policy announcements with a possibility of increase in 2HFY16 in response to diminishing gap between policy rate and average inflation.