Impact of US inflation data on stock markets, here are 5 things to watch out for in near-term | Mint
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Business News/ Markets / Stock Markets/  Impact of US inflation data on stock markets, here are 5 things to watch out for in near-term

Impact of US inflation data on stock markets, here are 5 things to watch out for in near-term

US inflation for October came in at 3.2%, below estimates but above the Fed's target, impacting the stock market. Nifty 50 and Sensex indices in India saw a bullish start following softer-than-expected US inflation data.

At 12:42 IST, Nifty 50 was trading at 19,639.80, up 196.25 or 1.01%, and Sensex was at 65,548.50 level, up by 620.03 or 0.95%.Premium
At 12:42 IST, Nifty 50 was trading at 19,639.80, up 196.25 or 1.01%, and Sensex was at 65,548.50 level, up by 620.03 or 0.95%.

The US inflation print for October came in at 3.2%, which was lower than analysts estimates but above the US Federal Reserve's 2% inflation target. This changed the sequence of events for the stock market on Wednesday. Tracking overnight cues from the US market, the domestic equities benchmark indices got off to a bullish start. Softer-than-expected US inflation data supported the view that the central bank might be done hiking interest rates.

Also Read: Markets rise 1% as softer US inflation print reduces risk of US rate hikes in near term, advances rate cut expectations

At 12:42 IST, Nifty 50 was trading at 19,639.80, up 196.25 or 1.01%, and Sensex was at 65,548.50 level, up by 620.03 or 0.95%.

“The Nifty 50 has now reached 19,618 after breaching the crucial psychological milestone of 19,500. Our next target, in my opinion, should be to reach about 19,800. A critical level is 19,670. The two crucial key levels to watch out is  in a band between 19,670 and 19,830. A blue sky zone would be achieved if we cross these levels," said Vinit Bolinjkar, Head of Research, Ventura Securities.

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Following this, the US 10-treasury notes fell 15 basis points to 4.5% indicating lowest in seven weeks, according to Trading Economics data.

Also Read: 8 things that changed for the stock market overnight - Gift Nifty, US inflation to MSCI index rejig

"The October US inflation data is a game changer for the stock market. The 3.2% October inflation print is lower than expected. More importantly, the mere 0.2% MoM increase in core inflation is hugely positive. The takeaway from these numbers is that the Fed is done with rate hikes and the timeline for rate cuts in 2024 is likely to be advanced. The sharp recovery in US markets will be reflected in India, too. Short covering can add to the rally. 

Foreign Institutional Investors (FIIs) are likely to turn buyers, lest they miss out on the rally in the best performing large economy in the world. Leading financials which were weighed down by FIIs selling will bounce back," said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Also Read: SRF, Aarti share prices rise 11-18% from October lows as Morgan Stanley gives a thumbs-up

Analysts say that inflation data has been very encouraging. Other positive macro indicators for the global markets include the Israel-Hamas war still in control, NATO urging Ukraine to resolve the conflict, stable oil prices, a decline in the dollar index, which indicates a flow of funds from the US to emerging markets, and India, which would benefit most from this flow of funds.

“Lower Inflation globally followed by cooling Israel Hamas tension and fall in crude would see major benefits out markets and if the trend continues we can retest markets new highs in short term," said Prashanth Tapse, Senior Vice President of Research at Mehta Equities.

Here are the 5 things to watch out for in near-term

Inflation trajectory 

Since the US Federal Reserve's primary concern was rising inflation, a decline in inflation will  result in lower interest rates. The US Fed will be less inclined to raise rates in the future. Analysts, predict that US interest rates could drop within the following three to four months if the downward trend of inflation continues. The Reserve Bank of India (RBI) governor can possibly look at softening interest rates, which has been elevated for a longer time.

RBI announced its fourth bi-monthly monetary policy on October 6. On expected lines, the RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) maintained status quo on rates and stance. The MPC decided unanimously to keep the policy repo rate unchanged at 6.50%.

“Easing macro economic data would also cool down Fed and look for rate cuts on it before March 2024. While the Fed will emphasized both the central bank’s commitment to returning inflation to the Fed’s goal and the uncertainty of the outlook," added Tapse.

Also Read: RBI Monetary Policy Meet Highlights: RBI delivers hawkish pause again; reiterates inflation target is 4% and not 2-6%

Crude oil price

According to analysts, the oil price has been extremely stable. Oil prices will therefore stay the same as a result of the sanctions and ban on Russian oil sales above $60. Analysts believe that the it would only be weakening more in this zone. And this indicates quite well for the future markets.

Also Read: Oil prices rise as OPEC raises 2023 demand projection, countering investor concerns; Brent at $82.85/bbl

Foreign institutional investor (FII) liquidity and Trend in Rupee versus Dollar

Softening of US core macro economic data would lead to pressure in bond yields and eventually we would see lower selling pressure from FII’s in the domestic markets.

The rupee's weakness at the moment is due to weak exports. It will also be somewhat advantageous for the market if the currency stabilises. That will encourage significant US investment. Therefore, if interest rates decline, bond yields would as well, which will encourage investors to raise their stake in emerging markets like India.

“The rupee's value in relation to the dollar has recently declined significantly. The vast majority of FIIs are not bringing fresh funds into the system.Because the rupee becomes less valuable and depreciates as soon as they put the dollar. There are no new investments. Given the appreciation of the dollar, they are liquidating their older holdings. If the rupee settles down and exports pick up I think they will be incentivised to come and invest in India," said Avinash Gorakshakar, Head Research of Profitmart Securities.

State Elections Results

According to Avinash Gorakshakar, Head Research of Profitmart Securities, given how unpredictable state elections may be, it would come as a negative surprise to the market if the Bharatiya Janata Party (BJP) were to lose tomorrow in Rajasthan and Madhya Pradesh (MP). Results for Rajasthan and MP will be out on November 25 and 30, and we will get all of the results by the first week of December. It will come as a short-term negative surprise if the BJP loses to the states. Market must be ready for that scenario as well if it occurs.

“So, there would be a major adverse impact if the BJP lost MP, which has historically been its home. Hence, there is talk of a Congress comeback in Rajasthan as well; these are the two state elections that the BJP is hoping to win. If the fit doesn't materialise, it will hurt the market sentiment in the near term," added Gorakshakar.

Can lower US inflation help Indian market make new peak this year?

According to analysts, apart from lower inflation print going forward it all depends on the results of the state elections; if there are two losses for BJP in a state election, the markets will quickly correct. State elections are obviously crucial; since 2024 is the election year, the whole political machinery will be active starting in January. The market will continue to be volatile.

Also Read: Suzlon hits 52-week high, IndusInd Bank, Paytm, Tata Motors DVR shares rally on MSCI Global Standard Index inclusion

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.


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Published: 15 Nov 2023, 01:05 PM IST
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