Hot US inflation kills hopes of rate cut in June, may halt India share market rally

The inflation reading may have also reduced the expectations of the number of rate cuts.

Higher-than-expected US retail inflation for March has delayed expectations of the Fed interest rate cuts to beyond June, sending equity markets in a tailspin, and bond yields soaring. A rate cut in June now looks unlikely, said experts.

The US consumer price index (CPI) rose 0.4 percent month-on-month in March, maintaining the same pace as in February. On an year-on-year basis, March CPI inflation was at 3.5 percent, accelerating from 3.2 percent year-on-year in February. Both month-on-month and year-on-year readings beat Reuters poll estimates.

Further, core inflation too remained hot, coming in at 0.4 percent month-on-month, and at 3.8 percent year-on-year.

Stocks fell. S&P 500, Nasdaq Composite and Dow Jones Industrial Average -- all tumbled about 1 percent or more. Gift Nifty on IFSC fell 0.6 percent, or 130 points to 22,629 at 8.40 pm IST, after the NSE Nifty 50 made a record high in intraday trading earlier.

Is the US Fed rate cut completely off the table for now?

"This is the 3rd successive 'hot' CPI print, and has completely shaken expectations of both the extent and the timing of rate cuts in 2024. We continue to maintain that the Fed will not cut rates this year, on the back of hotter inflation and slowing-yet-stable growth," said Madhavi Arora, chief economist at Emkay Global Financial Services.

The inflation reading may have also reduced the expectations of the number of rate cuts. “With this, the probability of a June cut (<20 percent) is minimal. Even July rate cut probability (45 percent) is less than even, with the first cut expectation being pushed to September meeting. This also means that the market now expects 2 cuts by year end instead of 3, said Pranab Uniyal, head of products at HDFC Securities.

Other experts also echoed similar views, saying the rate cut may get pushed beyond June.

"The data does not completely remove the possibility of Fed action this year, but it certainly lessens the chances the Fed is cutting the overnight rate in the next couple months," said Phillip Neuhart, director of market and economic research at First Citizens, according to Reuters.

"There is a high-risk cutting rates in June gets pushed out further. The probability is likely going to move lower after today's print, meaning that a June cut is less likely," said Ben Vaske, senior investment strategist at Orion, in a Reuters report.

Will US CPI halt Indian stock markets rally?

The impact may be felt strongly on the Indian markets, which may see a short-term correction, said experts.

“There is exuberance across the equity markets and commodities. They are all over stretched and just need a trigger to start correcting. Gold and silver prices, which are up almost 20 percent in last 6-7 weeks also need to correct. This hotter-than-expected inflation data would also cause a trigger for US and Indian markets to correct. US Fed might keep the interest rate unchanged for longer due to the data point,” said Amit Goel, co-founder and chief global strategist at Pace 360.

However, Ashish Goel of Investsavy PMS said the market may have only a knee-jerk reaction to the US CPI data, rather than a prolonged period of pain.

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