Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

IIP and Core Industries Diverged, but Will IIP Data Go Up Big Today?

There’s been a strange move in the Index of Industrial Production versus the “Eight Core Industries” in the previous month. The 8 core industries are those deemed core as they produce stuff that’s more like natural resources: Coal, Crude oil, Natural Gas, Petro-refined products, Steel, Cement, Fertilizers and Electricity.

Data is released two months late, like the IIP, but the Core Industries data comes a week earlier than the data on IIP.

Core Industries make up 37% of the weight of the IIP, so it has been useful to see the growth of the core industries to gauge how IIP will move. However, in Oct 2014 there was a severe disconnect: the core industries index grew 6.89% but the IIP for October went NEGATIVE on growth to -4.25%.

image

Granted, that was due to a severe degrowth in the “communication equipment” area and the one time Diwali impact (we had a very good note on it when data was released last month)

Later today, we will see IIP data (5:30 pm) for November 2014. Given that

  • the core industries data looks good  at 8.27%
  • the Diwali impact will work in our favour for November
  • the “communications equipment” data will be less unfavourable (responsible for -4% of the -4.25% in October)

Will we see a much better IIP number?

Some of this is expected, due to the base effect (Diwali impact). But in general we should expect a positive number, not as high as 8%, but much better than the -4.25% in October. A negative surprise can take markets down, because it means that inspite of so many headwinds in our favours our production statistics have not improved.

We’ll tune in post 5:30 with an update. Positioning yourself for a large move means buying puts and calls, and they are relatively inexpensive at this point.

  • Piyush Lohia says:

    Hello sir,
    Can you please explain me how exactly the base effect (here Diwali effect in that context) actually works. I’m not able to understand how exactly my IIP figures get affected by it.
    Thanks in advance.

  • esotericBlue says:

    i switched “headwinds” to “tailwinds” while reading, “because it means that inspite of so many headwinds in our favours our production statistics have not improved.”