Last week, the domestic market traded in a narrow bracket of 19,350 to 19,450, after a mild gap up, and straggled to cross 19,500. Following the Diwali holiday, the market commenced the current week with a substantial gap up, surging notably beyond 19,600. The week concluded with the market closing at 19,731.8, attaining a peak of 19,875, which is the high observed in the preceding month, October.
The swift and extensive shift in market sentiment is driven by a global factor, stemming from a substantial than predicted decline in global inflation data. The US October CPI fell to 3.2% from 3.7% in Sept. Elevated inflation and its consequential impact on bond yields, coupled with a hawkish monetary policy, pose significant challenges to the global stock market. The market responded instantly to the data, experiencing a relief surpassing expectation. Subsequently, bond yield reduced below 4.5%, about 25bps on a WoW basis. This optimism is mirrored in the 2.1% WoW gain of the US S&P500 index, on Thursday closing.
There is a growing perspective suggesting that the Fed’s hawkish stance may ease, possibly resulting in more moderate rate cuts in 2024. This speculation gains momentum as the economy has seemingly broken free from the constraints imposed by the pandemic-induced low capacity, with supplies returning to a more normal state. And central banks are attempting to reduce monetary supply in the system to curb inflation. And well, geopolitical risk is narrowing, and crude prices are on a downward slope.
However, the point of concern is that the governments are still continuing its large fiscal program with an elevated fiscal deficit. National elections are staged in the US and India next year, which is more reason to continue. Household consumption is high, led by a high amount of free cash, and low unemployment rate. Hence, there is still a risk that inflation will continue to be above the normal range for a persistent period, limiting the bounce rally.
US CPI and Bond Yield Trend and Forecast…
Source: Bloomberg
Economists forecast a prolonged period of inflation above the long-term average, with consequential effects on bond yields, factor which don’t bode well for economic and market prospects. Central Banks are in the drill to manufacture a slowdown to bring inflation under control. They will continue to hold rates high to achieve that program unless a profound slowdown emerges, the chance of which has reduced. For example, the probability of a US recession has reduced to 55% from 65% in Jan 2023, stating that the economic is strong.
Therefore, a deliberate economic slowdown is anticipated, which may not favour the stock market in the medium term. Initially, business and earnings slowdowns may downgrade, and the Fed will maintain high rates to curb inflation below the long-term average. Like US GDP growth for CY24, it is forecast to reduce to 1% from 1.9% and 2.3% in CY22 & CY23, respectively. While India is projected to maintain resilience owing to a stable domestic economy and detached external demand, but valuations may contract due to a reduction in financial liquidity.
The RBI, is foreseeing a risk in the system of excess liquidity, has measured to raise the risk weightage of unsecured loans from 100% to 125% and credit cards from 125% to 150%. This may be in anticipation of a rise in NPAs and highly for categories like Credit Card and Personal Loans, in the future. And to safeguard banks equity and reduce the outflow of funds to high-risk assets. This will have a moderate effect on the bank’s earnings growth, with an increase in lending rates especially for NBFCs, fall in consumer demand and flow of liquidity in the economy.
The author, Vinod Nair, is Head of Research at Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 19 Nov 2023, 12:51 PM IST