US inflation prints dent rate cut hopes; what will move the market now? Here’s what 5 experts say
Most experts believe there is still a high possibility that the US Fed will start reducing rates from June even as inflation remains above the Fed's 2 per cent target and the US economy remains strong.
The hopes for the Fed to soon initiate rate cuts in the US were dealt a blow on Tuesday when the US inflation prints for February came above market expectations.
The US Consumer Price Index (CPI) for February registered a 3.2 per cent annual increase. This was slightly over the market expectations of 3.1 per cent.
However, the US market finished higher on Tuesday, with megacap technology stocks leading from the front despite worries that a hotter-than-expected February inflation reading could delay the Federal Reserve's interest-rate cuts until the second half of 2024.
Conversely, the Indian stock market suffered strong losses the following day, with Sensex and Nifty 50 falling over a per cent each and the overall market capitalisation of BSE-listed firms plunging by as much as about ₹13.5 lakh crore in a single session.
The domestic market appeared concerned that a delay in rate cuts could deter foreign capital inflows into it.
The anticipation of rate cuts has remained a significant market catalyst for nearly a year.
While the domestic market will undoubtedly respond to global cues, macroeconomic indicators, earnings reports, and political developments, it's undeniable that rate cuts will continue to be a primary driver for the market moving forward.
What will move the market?
Most experts believe there is still a high possibility that the US Fed will start reducing rates from June even as inflation remains above the Fed's 2 per cent target and the US economy remains strong.
However, the number of cuts could be lesser and also the extent of rate reduction may not be deep. While a shallow rate cut may disappoint the market, experts believe the market will eventually focus more on fundamentals and less on the Fed.
Here are the perspectives of five leading experts on the anticipated Fed rate cuts and the triggers that will move the market going forward. Take a look:
Deepak Jasani, Head of Retail Research at HDFC securities
We think that there is a 50 per cent chance that the first rate cut could come in June; however, if in the interim, the US economy keeps showing strength in terms of high job additions with low inflation, then the urgency to cut rates will disappear for the time being.
While the US economy kept doing well, irrespective of high rates, the Street will now wait for indications of rate cuts as the drivers of the US economy so far may lose steam gradually.
V K, Vijayakumar Chief Investment Strategist, Geojit Financial Services
The market expectation at the beginning of this year was around five rate cuts by the Fed. Now, after the stubborn inflation and strong economy, the market is veering around to lower rate cuts, say, two or three.
The first cut in interest rates may come in June.
It is important to understand that a 50 per cent appreciation in the S&P 500 index in 2023 came from seven stocks. These are fundamentally strong stocks. The market is resilient in hopes of a soft landing for the U S economy, which appears to be the emerging scenario.
Siddhartha Khemka, Head of Retail Research, Broking and Distribution, Motilal Oswal Financial Services
Though the inflation came in slightly higher than expected, the super core CPI stood at 4.3 per cent, down from 6.1 per cent a year earlier. This somewhat provided comfort to the investors and kept their hopes alive about rate cuts from June onwards.
The market is seeing an 84 per cent probability that the Fed will lower rates in June and have priced in 90 basis points of cuts for the year.
US Fed policy outcome next week would provide more clues on its action going ahead.
In the near term, the Fed’s action would have a bearing on the market movement. In case the rate cut gets delayed beyond June, then it might dampen the sentiment as the earnings estimate for FY25 is pricing in at least a 90 bps rate cut.
But in the long term, the market would be driven by fundamentals.
India is currently enjoying the confluence of the best macro and micro tailwinds with nearly 7 per cent GDP growth, moderating inflation prints, rangebound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings. This is likely to keep the long-term trend positive for the market.
Ajit Banerjee, Chief Investment Officer at Shriram Life Insurance Company
The Indian market participants aren't showing exuberance at this point, possibly keeping in mind the concerns expressed by the market regulator about the froth built-up that has happened in the mid-cap and small-cap segments. Moreover, some profit booking is getting done because of the financial year closing approaching.
The Indian markets nowadays get more influenced by domestic news and players as opposed to foreign news and players, which used to be the case a few years ago.
Sujan Hajra, Chief Economist, Anand Rathi Shares & Stock Brokers
The recent US inflation data exceeded expectations, indicating ongoing inflationary pressures. Nonetheless, the persistent longer-term deflationary trend suggests that a rate cut by the Federal Reserve in June 2024 remains the likely course of action.
While short-term equity market movements may be influenced by news and events, we believe that the Indian market's direction is not heavily reliant on US debt market conditions or policy rates.
The rally in the Indian market has primarily been driven by stronger-than-anticipated GDP growth, robust corporate earnings, and a sustained decline in domestic inflation rates.
Looking ahead, we expect these fundamental factors and valuation metrics to remain key drivers of the Indian equity market over the medium to long term. However, short-term market volatility may still be influenced by news, events, and fluctuations in equity market flows.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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