Powell delivers on expected lines; Indian markets to consolidate: Analysts

US Federal Reserve (US Fed) chair Jerome Powell’s speech at the Jackson Hole symposium was on expected lines, said analysts, who believe the US central bank could hike rates by another 25 basis points (bps) going ahead.

The US central bank, Powell said, is prepared to hike the benchmark rates and keep the borrowing costs high until inflation comes in the target range of 2 per cent.

“It (the speech) did not break new ground, and overall the language used was in line with his previous comments. Powell's speech leaves the outlook for Fed policy uncertain and highly data-dependent. Markets are pricing in around a 50-50 chance of the Fed delivering one additional 25-basis-point rate hike by November, which is reasonable,” wrote Brian Rose, senior US economist, CIO America, at UBS in a recent note.

The upcoming personal consumption expenditure (PCE) report (August 31), the Employment Report (September 1), and the CPI report (September 13) in the US, analysts said, will now be on the market's radar to assess whether a rate hike by the US central bank in September is warranted.

“It looks like the Federal Open Market Committee (FOMC) wants to wait until November before continuing the hiking cycle. By then, we expect the economic data to have deteriorated and avert a hike. However, the risk to our baseline is to the upside. As long as the economy stays strong, and labor markets tight, additional hikes are likely," said Philip Marey, senior US strategist at Rabobank International.

Indian markets to consolidate

The developments, analysts suggest, will keep the market sentiment back home in check, especially in the backdrop of the rally seen since March 2023 lows, and the latest CPI inflation print.

“The base case is for more consolidation for Indian stocks before the next leg up. The Nifty is down 3.1 per cent from the record high reached on July 20. Still the positive point, and a major reason to add on any pronounced pullback, is mounting bottom-up evidence of a capex cycle. Meanwhile, money markets are still not expecting any more rate hikes by the Reserve Bank of India (RBI),” wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

In its August policy, the RBI’s monetary policy committee (MPC) had kept the repo rate unchanged at 6.5 per cent for the third consecutive time. However, the central bank revised its inflation projections for 2023–24 (FY24) to 5.4 per cent (previously 5.1 per cent). Projections for the second (Q2) and third quarters of FY24 also saw significant upward revisions to 6.2 per cent (from 5.4 per cent) and 5.7 per cent (from 5.4 per cent), respectively.

The consumer price index (CPI)-based inflation surged to 7.44 per cent in July, the highest since April 2022. This was the first time since September 2022 that the price rise had exceeded 7 per cent.

“Equity markets are expected to remain volatile due to weakness in the external environment. While corporate earnings of Indian companies are showing strong growth, valuations aren’t cheap and there is limited room for them to expand. Hence, investors are likely to get returns in line with earnings growth till the end of the year,” said Hemant Kanawala, senior executive vice-president and head of equity at Kotak Mahindra Life Insurance Company.