Headline inflation in the US is showing signs of easing as the consumer price index (CPI) has cooled to 3.2 percent in October, decelerating from 3.7 percent over the year ended September 2023, due in large part to a fall in gas prices. The recent data not only sparked a rally in US equities, but also led to a cool-off in US dollar rates and treasury yields.
In fact, investors are hoping that lower-than-expected inflation numbers will give the Fed (the US central bank) cover to embrace a less hawkish stance. Fed doves are betting on an earlier-than-expected rate cut as inflation heads down towards the Fed’s target of 2 percent. So much so that the street is supremely divided over the quantum and number of rate cuts in 2024.
UBS and Morgan Stanley expect the Fed to be aggressive with rate cuts, but Goldman Sachs backs the Fed’s dot plot that indicates as many as two interest rate cuts in the coming year. A view that Andrew Freris, CEO of Ecognosis Advisory, concurs with.
In an interview with Moneycontrol, Freris emphasises the Federal Reserve's unwavering commitment to its 2 percent inflation target even in the face of recent data trends that suggest a flat or downward trajectory. He believes that rate cuts in the first half of 2024 are improbable, as the central bank aims to preserve its credibility in the market.
The dot plot is a chart updated quarterly that records each Fed official's projection for the federal funds rate.
Also Read: Two key risks to India economy: Morgan Stanley tells what could derail growth in 2024
Fed’s rate trajectory & US equities
Freris echoes Fed Chair Jerome Powell's projections, indicating that the Fed may not witness inflation reaching 2 percent mark until 2025. Anticipating two potential rate cuts by the end of 2024, Freris underscores the importance of the Fed's measured approach to avoid disrupting the economic progress achieved thus far.
Alluding to the recent surge in US equities, Freris points out that markets are not factoring in the Fed’s repeated communication of the 2 percent target for US inflation which, in a way, virtually rules out more than two rate cuts in 2024. The key condition for any deviation, such as a rate cut, is contingent upon inflation hitting and sustaining at that 2 percent level, maintains Freris.
“As I interpret it, the markets may not fully factor in this perspective, leading me to withhold enthusiasm. Powell's assertion that he doesn't anticipate inflation reaching the 2 percent rate until 2025, not 2024, further underscores the Federal Reserve's deliberate and patient approach,” says Freris.
He further highlights the often-underestimated influence of political events, with the upcoming presidential election adding an extra layer of uncertainty. Interestingly, the markets appear to have overlooked the upcoming presidential election. While the election is scheduled for November, the potential re-election of Trump could hold profound implications for the markets, he adds. This critical political aspect seems to have been overlooked, dismissing the substantial impact that political events can exert on market dynamics.
India vs China: How will the money flow?
Analysing China's economic data, Freris points to a steady yet restrained economy, marked by minimal inflation and deflationary indicators such as the new home price index, and industrial production. According to Freris, the data paints a picture of an economy maintaining a relatively stable trajectory — not necessarily negative, but certainly not indicative of robust growth.
“Inflation in China is hovering around zero, exhibiting a remarkable deflationary trend. While the GDP is poised to potentially reach 5 percent, the new home price index throughout China has experienced a prolonged period of deflation, remaining negative for the past 18 months. Furthermore, the Index of Industrial Production (IIP) is holding steady, with the retail sales sector showing a slight improvement. Delving into specific sectors such as property and industry, we see the property sector is witnessing continued price declines, while the industrial sector remains largely flat,” adds Freris.
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