The much-anticipated Federal Open Market Committee (FOMC) meeting is out of the way for the stock market, but has left equity investors a bit clueless. For the fourth time in a row, the US Federal Reserve raised its short-term lending rate by 75 basis points (bps), with the target range now at 3.75-4%. Taking into account the fiercely hot inflation, the increase in interest rates was largely quantified.
However, Powell’s comments disappointed equity investors. The final conclusion for the stock market from this meeting is that investors should be prepared for small rate hikes from here on, and terminal rates will be higher than previously expected. The announcement has dashed investors’ stagnation or expectations. A pivot refers to the point at which the US Fed reverses its current monetary policy stance.
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Needless to say, inflation, employment and housing data prints from the US will be crucial for the December FOMC meeting. Monetary policy measures have results on economic activity and are accepted by the US central bank. Therefore, the Fed’s ongoing aggression to contain inflation at the expense of recession is troubling some market experts. Worryingly, the risk of a hard landing of the US economy continues to grow.
Pantheon Macroeconomics chief economist Ian Shepherdson said the Fed has now done enough to make policy explicitly restrictive, and that intense pressure on inflation is now in the pipeline. “Powell should know that he is taking a real risk with the economy. We think core inflation peaked in September, so the Fed is now in unknown territory, promising to continue raising rates,” he said. Said in a note on Nov.
At present, there is no respite for equity investors from the fear of hike in interest rates. “No matter how big the next rate hike, financial conditions will likely continue to tighten. Fed tightening cycles are often characterized by high volatility, particularly in riskier areas of markets, said Colin Martin, director and fixed income strategist at Charles Schwab.
Unsurprisingly, equity investor sentiments reacted negatively to the Fed’s comments with major Asian markets on Thursday. Indian stocks saw a relatively minor decline with the benchmark index Nifty 50 closing down 30.15 points.
“One factor that is working in favor of Indian stocks is the change of heart by Foreign Institutional Investors (FIIs), who have recently turned buyers. However, how long this trend will continue is no one’s guess. will be challenging, he said.
Concerns about future rate hikes aside, the September quarter earnings season, which is underway, is crucial for Indian equity investors. Analysts said so far it has been a mixed bag. Banking, financial services and insurance sectors have shown improvement in performance, but companies in the fast-moving consumer goods (FMCG) and cement sectors have experienced pressure on operating margins. Jasani said there are not enough triggers that indicate an increase in earnings.
Meanwhile, the MSCI India Index continues to hold a valuation premium over its Asian peers. The country enjoys a high price-to-income multiplier as its macro-economic outlook is expected to be relatively better. Nevertheless, potential risks from volatility in crude oil prices should be watched out for. India is a net importer of this commodity and the Indian rupee has recently seen a sharp decline against the US dollar.
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