Are the stock markets prepared for a delay in interest rate cut?

A higher-than-expected consumer price inflation (CPI) inflation print for March in the US has dashed hopes of an interest rate cut by the US Federal Reserve (US Fed) in June. Analysts now expect the US central bank to start cutting rates in September, provided inflation remains in check and oil prices remain supportive.

The markets, analysts believe, partially factored in this possibility. Leading equity markets across Asia lost ground on Thursday with Nikkei 225, Hang Seng and Singapore markets slipping up to 1 per cent. Indian markets were closed on Thursday. Experts believe that once they open for trade on Friday, there can be a knee-jerk reaction at best, post which there can be a recovery.

 

“Most Asian markets recovered in trade on Thursday after an initial negative reaction. This will hold true for the Indian markets as well once they open for trade on Friday. That said, there are many moving parts to the ‘markets story’ back home, such as oil prices, geopolitics, general elections etc. A higher for longer narrative as regards rates has to some extent been factored in,” said U R Bhat, co-founder & director at Alphaniti Fintech.

US consumer inflation in March, meanwhile, surged to 3.5 per cent from a year ago, data showed, from 3.2 per cent in February. On a month-on-month basis, the rise was 0.4 per cent, which was mostly driven by petrol and shelter costs.

“Rates (in the US) should remain on hold until September. Looking into next year, we still expect Trump to be inaugurated as the next President and impose a universal tariff that will lead to a rebound in inflation during the course of 2025. This should prematurely halt the Fed’s cutting cycle next year,” said Philip Marey, senior US strategist at Rabobank International.

Towing the line

As regards rate cuts, analysts expect the global central banks, especially in Asia, to follow the Fed in rate cutting cycle. Fed rate cuts, according to analysts at Morgan Stanley, are getting priced out and the dollar is still strengthening, while Asian currencies remain on the weaker side. 

Central banks, they believe, may be cautious that the potential for further currency depreciation may yet impart some upside to inflation, bringing the risk that inflation does not stay durably within target. 

"We have been highlighting that Asian central banks will wait for the Fed to begin cutting rates before they embark on policy easing. If oil prices rise to $110-120 per barrel (bbl) in the next three – four months due to supply or geopolitical concerns in a sustained manner, this would create concerns over the inflation outlook. Higher energy prices would lead to higher headline inflation pressure and may impart upside risks to the inflation outlook,” wrote Chetan Ahya, chief Asia economist at Morgan Stanley in a recent note.

Market direction

Back home, the market direction in the near-term will also be determined by the upcoming results season for the March 2024 quarter (Q4-FY24), outcome of the Lok Sabha elections and the overall market valuation.

Earnings growth in India, according to analysts, is showing signs of contraction, with earnings per share (EPS) growth expected to moderate to 5-10 per cent in Q4-FY25 compared to the robust 25 per cent experienced between April and December 2023.

As an investment strategy, experts suggest investors remain stock-specific and look for earnings visibility and reasonable valuations. 

“We are particularly inclined towards domestically driven sectors such as fast moving consumer goods (FMCG), infrastructure, cement, and telecom due to their stable demand outlook for FY25 and the potential for reduced operational costs. Additionally, defensive sectors like information technology (IT) and pharma offer resilience over the medium-to-long term, owing to their stable margin projections, lower input costs, and potential gains from a stronger dollar,” said Vinod Nair, head of research at Geojit Financial Services.