Markets rise 1% as softer US inflation print reduces risk of US rate hikes in near term, advances rate cut expectations

Buoyed by US inflation data for October, the Sensex and Nifty, having opened up a gap, were trading with gains of nearly 1% on softer Indian inflation data and prompted the expected decline in more UK details.

The inflation-based Wholesale Price Index (WPI) contracted for the seventh consecutive month in India in Oct’23, down 0.5% YoY. Even UK inflation data came in lower than expected and the inflation rate in October at 4.6% slowed sharply from 6.7% growth in September. However, the drop in US October CPI to a 3-month low of 3.2% was the major boost to investor sentiment and across global markets. It not only decreased from 3.7% in the previous month but significantly decreased from 9.2% in June 2022.

The US 10 Year bond yield and the Dollar Index fell to a 2 month low at 4.42% and 104 levels. This meant that while the rupee strengthened and gained 25 paisa to 83.08 to the dollar

Experts said the most important takeaway from a softer inflation print was that it reduced expectations of any interest rate hikes in the near term. The prospect of another hike in the US has added to the concerns that have led to volatility in global markets since September. The same also meant a regular rise in US Bond Yields and also a strengthening of the dollar index. Against this background expectations of softer US inflation have now also increased with interest rate cuts sometimes being prepped in 2024.

Deepak Jasani Head of Retail Research at HDFC Securities said the prospects of an interest rate hike have been dampened by softening US inflation. The Inflation and Jobs market remains tight, however, and the interest rate cuts will depend on those parameters. With the US inflation number softer than expected in October, while only 10% of respondents expected rate cuts by March 2024, 30% now expect rate cuts starting in March 2024.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stockbrokers echoed similar sentiments saying that the chances of another rate hike in the US anytime soon have diminished. Hajra said that “monthly inflation data is highly volatile so no definitive conclusion should be drawn from a much lower than expected reading of the latest US retail inflation number. That said, the trajectory of inflation in the United States is going down, especially core inflation without taking into account, This has significantly reduced the chances of another rate hike in the United States and increased the possibility of rate cuts over the six months ahead, it was said. Hajra

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Hajra added, however, that the resilience of the labor market may prevent any decisive action from the Federal Reserve anytime soon. “We think the policy rate and bond yields in the US have peaked although a significant decline in both, especially the former, would be some time away,” Hajra said. This is positive for both global debt and equity markets. As the yield in the Indian debt market has not followed the spike in the US market, we do not expect much yield compression in India in this financial year.

“The October US inflation data is a game changer for the stock market,” said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. October’s 3.2% inflation print is lower than expected. More importantly, the 0.2% month-on-month increase in core inflation is extremely positive. The takeaway from these numbers according to Vijayakumar is that the Fed is done with rate hikes and the timeline for rate cuts is likely to be advanced in 2024. The sharp recovery in US markets will also be reflected in India. Short covering can add to the rally.

Falling bond yields and the dollar index could also be positive for FPI flows. Foreign Portfolio investors had turned net sellers in Indian Equities since September due to another rate hike in the US as a result of rising Bond yields and strengthening of the Dollar index, the two main factors influencing IPT flows.

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With a decline in the dollar index and bond yields, some foreign funds sitting on the sidelines could be directed towards India as a result of the Indian upgrade, HDFC’s Jasani said.

FIIs are likely to turn buyers, lest they miss out on the rally in the world’s best-performing major economy. Prime financials which had been reduced by FII selling will bounce back. Declining CPI inflation in India is also a favorable factor

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Updated: 15 November 2023, 01:34 PM IST

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