Moneycontrol Pro Panorama | Let’s face it, Fed’s aggressive policy has many side-effects

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Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

The latest jobs report from the US shows a red hot labour market with unemployment dropping to 3.5 percent. That seems to seal the deal for yet another 75 basis points rate hike by the US Federal Reserve Open Market Committee when it meets on November 1.

US 10-year treasury yields inched close to 4 percent and investors made a beeline for dollar assets. With crude oil too shooting past $97 a barrel, the rupee plunged to a fresh low of 82.72 to a dollar. Domestic equity markets also opened as much as 1.6 percent lower before recovering mid-day, although they are still in the red. Equity markets also have to contend with the fact that September quarter earnings are likely to be weak, with margin pressures in several industries.

US consumer price inflation numbers are due on Thursday, but the labour market report has all but squashed talk of a Fed ‘Pivot’ which had gained steam during recent days. With the S&P500 in bear territory, any actual pivot or rise in expectations of one could lead to a rally, but that is likely to be short-lived. All this breathless tracking of Fed officials of clues to what they might do next has led to short-term volatility in the market.

However, it’s not all about the Fed, argues this FT article (free to read for Pro subscribers). “Investors should resist the knee-jerk reaction of rushing to speculative assets based solely on the Fed potentially reversing course. Their portfolios also need to reflect the realities of an approaching profits recession,” writes Richard Bernstein, chief executive and chief investment officer of Richard Bernstein Advisors.

In a similar vein, my colleague Neha Dave writing today cautions investors about getting caught in bear market rallies.

“With a rise in risk-free rates (due to Fed’s aggressive interest rate hikes) and falling profits, there is good reason to believe that P/E multiples, which averaged over time, will themselves contract. The upshot —with the expected slowdown in profit growth and the associated contraction in P/E multiples— is that real longer-run stock returns are likely to be notably lower than in the past,” she writes. You can read more here.

The biggest side-effect of the Fed’s aggressive tightening — apart from causing a recession — is the strong dollar, which Ruchir Sharma has described as a wrecking-ball, in this piece for FT (free for Pro subscribers). He argues the dollar has strengthened beyond fundamentals, and that the Biden administration can weaken the US currency without undermining the fight against inflation. Read more here.

Investing insights from our research team

Dabur India: Margins likely to have bottomed out in September quarter
Titan Company: Show set to take on more sparkle

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The Eastern Window: Saudi royals join China, Russia in refusing to toe US line

Bharat Forge gains from record US truck orders amid macro uncertainties

Tricks of the trade to halt exports slide

India’s Labour Market Databases: Parallels from Satte Pe Satta

With e₹, India joins the CBDC bandwagon

Ban on Brickwork Ratings is harsh, questionable

India’s balancing act on Russia is getting trickier

Technical Picks: Tata Communications, JB Chemicals, Zinc, USD-INR, Wipro and Mishra Dhatu Nigam (These are published every trading day before markets open and can be read on the app)

Ravi Krishnan
Moneycontrol Pro