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

Encouraged by the US inflation data for the month of October the Sensex and Nifty, after a gap up opening, were trading with gains of almost 1%. The softer India inflation data and expected softening in the UK data further encouraged.

The Wholesale Price Index (WPI)-based inflation In India contracted for the seventh consecutive month in October’23, down 0.5% YoY. Even the Uk inflation data also came lower than expectation and inflation rate in October at 4.6%  slowed sharply from a 6.7% growth in September. However the major boot to the  investor sentiments and across the global markets was provided by the decline in US October CPI to 3-month low of 3.2%. Not only it softened from 3.7% in the previous month but has come down significantly from 9.2% in June 2022.

The US 10-Year bond yield and Dollar Index fell to 2-month low at 4.42% and 104 levels. This meant that while the rupee strengthened and gained 25 paisa to 83.08 to a dollar

Experts said that the key takeaway from the softer inflation print is that it has reduced the expectations of any interest rate hikes in the near term. The expectations of another hike in the US had added to the concerns leading to volatility in the global markets since September. The same also meant a regular rise in US Bond Yields and also the strengthening of the dollar index. In this backdrop a softer inflation print in the US now also has increased expectations of interest rate cuts being preponed sometimes in 2024.

Deepak Jasani Head of Retail Research at HDFC Securities said that the Interest rate hike expectations have reduced with the softening of US inflation. The Inflation and Job market however are still tight, and the interest rate cuts will be dependent on these parameters. With softer than expected US inflation number in October while earlier only 10% of participants were expecting the rate cuts happening by March’2024, now 30% are expecting rate cuts starting March 2024.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stockbrokers echoed similar views saying that chances of further rate hike in the US in near term have reduced. Hajra said that “Monthly inflation data are notoriously volatile and therefore no definitive conclusion should be drawn from a significantly lower than expected reading of the latest retail inflation number in the US. That said, the trajectory of inflation in the US has been downwards, especially core inflation excluding shelter,  With this, the chances of another rate hike in the US got significantly reduced and the possibility of rate cuts beyond the next six months got increased, said Hajra

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Hajra however also added that the resilience of labour market may prevent any decisive action by the Federal Reserve in the near turn. "We feel that both the policy rate and bond yields in the US have peaked out although significant softening of both, especially the former, would be some time away," said Hajra. This is positive for both global debt and equity markets. As the yield in Indian debt market has not followed the spike in U.S. market, we do not expect much compression of yield India in this financial year.

“The October US inflation data is a game changer for the stock market, said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. The 3.2% October inflation print is lower than expected. More importantly, the mere 0.2% month on month increase in core inflation is hugely positive. The takeaway from these numbers as per Vijayakumar 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.

The softening of bond yields and the dollar index may also be positive for the FPI flows. Foreign Portfolio investors had turned net sellers in the Indian Equities since September as expectation of another rate hike in the US led to rise in Bond yields and strengthening of the Dollar index, the two key factors that impacted FPI flows.

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With the softening of dollar index and bond yields, the Indian upgrades can lead to some foreign funds sitting on the fence being directed towards India, said HDFC’s Jasani.

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 FII selling will bounce back. Decline in CPI inflation in India is also a favorable factor.ad