Soft US inflation data drives Sensex and Nifty to four-month high

Indian markets rallied on Thursday after softer-than-expected US inflation data triggered hopes that the US Federal Reserve (Fed) might go slow on rate hikes.

The Nifty rose 124 points, or 0.7 per cent, to close at 17,659 - the highest since April 11.

The Sensex ended the session at 59,332, with a gain of 515 points, or 0.8 per cent.

From this year’s lows on June 17, the Sensex and the Nifty have jumped 13 per cent and are now less than 5 per cent shy of new lifetime highs.

Most global markets got a boost after the US consumer price index rose 8.5 per cent year-on-year in July, against a 9.1 per cent rise in June, which was also the highest in four decades. There was no rise on a month-on-month basis against a 1.3 per cent rise in June. The inflation numbers raised hopes that price rises have peaked in the US and the Fed might go easy vis-à-vis rate hikes.

The US equity markets cheered the inflation numbers, with the S&P 500 gaining over 2 per cent and the Nasdaq rallying nearly 3 per cent to enter the ‘bull market’. The technology-heavy Nasdaq is more sensitive to rate-change expectations.

Analysts said investors are a bit more hopeful of a softer landing of the economy after the US inflation numbers.

“If inflation is coming under control, there may not be a need for that many hikes the markets have factored in. After a few more hikes, neutral territory might be reached. If oil prices continue to get softer, there may not be a requirement for further hikes,” says U R Bhat, co-founder, Alphaniti Fintech.

Foreign portfolio investors (FPIs) on Thursday bought shares worth Rs 2,298 crore. Since July, FPIs have pumped in nearly Rs 30,000 crore into domestic stocks after yanking out over Rs 2.2 trillion during the first half of the calendar year.

The rebound in the market after June lows and revival in FPI flows is based on the premise that the worst of inflation is behind us. However, the market seems to have overdone this trade, experts say.

“Everyone is looking over someone’s shoulder and seeing what FPIs are doing. If FPIs are not that aggressive, people will want to book profits. People are not too comfortable with these valuations. The war in Ukraine is still raging. The Taiwan crisis continues to simmer. One reading does not change everything. If the war continues as winter approaches Europe, things can turn from bad to worse,” adds Bhat.

BofA India on Thursday revised upwards its Nifty target to 15,600, from 14,500, citing easing of some concerns, but maintained a cautious stance.

“We remain cautious on markets on the current volatile environment and the looming global recession concerns. While we see risks of further earnings cut, we note some of the earlier feared risks that we had highlighted - crude sustaining at higher levels, depreciating rupee, and rising inflation - are showing some initial signs of moderation,” said Amish Shah, head of research at BofA India, in a note.

The Nifty currently trades at about 15 per cent premium to its 10-year average price-to-earnings multiple.

Fed officials in their comments made it clear that they are determined to fight inflation.

Minneapolis Fed Bank President Neel Kashkari said the US central bank was far, far away from declaring victory on inflation. Kashkari added that he is yet to see any need to change the Fed’s plan to raise rates to 3.9 per cent by the end of the year and 4.4 per cent by 2023.

Mary Daly, San Francisco Fed president, said it’s too early to declare victory against inflation. Although Daly said a half percentage hike was her baseline, she did not rule out a third consecutive 0.75 per cent hike.

Crude prices rose 1.6 per cent and were trading at $100.7 per barrel.

The market breadth was strong, with 1,796 stocks advancing and 1,596 declining. The broader-based Nifty Midcap 100 and the Nifty Smallcap 100 indices outperformed the benchmarks with 0.9 per cent gains.