Moneycontrol Pro Panorama | Fed’s last-mile quandary is no worry for markets

The Fed not only upgraded its GDP forecasts for 2024, but also calmed naysayers on rate cuts.

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Global markets cheered Fed chair Jay Powell’s narrative that stronger-than-expected economic growth in the US and a strong labour market would not stop the central bank from cutting rates in 2024. Instead, he said the central bank would stick to the dot-plot of three rate cuts in the year that would lower rates by 0.75 percentage points from the present 23-year high of 5.25-5.5 percent.

For the near term, economists seem to have put aside concerns about growth. Sustained growth in the US economy, an improving milieu in Europe, a strong recovery in Japan, and China bottoming out turned investors bullish on global markets. The Fed not only upgraded its gross domestic product (GDP) forecasts for 2024, but also calmed naysayers on rate cuts with nine officials (versus six in the December meet) agreeing to rate cuts soon.

The question, however, is whether Powell is being too optimistic. Some economists point out that after initially bringing down inflation, the last mile would be a bumpy and challenging road.

This FT article (specially for MCPro subscribers) brings to light some contrarian views, too. Inflation is sticky in the US and globally, exacerbated by geopolitical tensions. Petrol costs are high, as are rents, mortgages and insurance. “Powell also downplayed the risks that the US’s persistently hot labour market would hinder the inflation fight,” says the article.

Be that as it may, equity markets are clearly unfazed. Almost all global indices are flashing green. Fuelling investor sentiment were the findings of the Bank of America Fund Manager Survey. Indeed, inflation is the biggest tail risk for equities, but the global sentiment is “bullish”. The survey highlights that 23 percent of fund managers said, forget about recession, there wouldn’t even be a landing for the global economy. This article brings to light why fund managers are bullish on global growth.

As for Indian equity markets, while uncertainty about global flows may continue, the recovery in global growth also augurs well for Indian exporters exposed to discretionary demand in these markets, says Anubhav Sahu from MCPro’s research team. He writes about what the Fed decision and narrative means for Indian investors in the near term.

Adding fuel to the already heated equity markets was the India Flash Purchasing Managers Index for March 2024, which shows very strong growth in both manufacturing and services. “With rising sales, higher new orders, better exports and increased employment, the Indian economy, or at least that part of it represented by the PMI, is in fine fettle,” says Manas Chakravarty in this article.

With the news favouring equity markets, global indices are likely to trend upwards. Perhaps, investors would wait for the next round of corporate earnings or any data on consumption trends that have been posers lately. The FT article quote sums it up: “The Fed is no longer the most important driver of market trends,” said Tony Welch, chief investment officer at wealth management firm Signature FD. “Now, it’s improving corporate fundamentals that everyone is watching.”

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Event alert: Moneycontrol and CNBC TV18 are hosting the ultimate event on artificial intelligence, bringing together entrepreneurs, ecosystem enablers, policymakers, industry leaders, and innovators on March 27th in Pune. Click here to register and gain access to the AI Alliance Pune Chapter.

Vatsala Kamat
Moneycontrol Pro