Moneycontrol Pro Panorama | Rate hike fears ease, but what about recession?

(Illustration by Suneesh K.)

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Equity markets world over bounced in joy after the US Federal Reserve’s announcement of a 75 basis points (bps) rate hike on Wednesday. After strong gains seen on Wall Street, Asian indices, including Indian benchmarks, opened higher today, as if acknowledging the message that the Fed rate is now in “neutral” territory. This implies that the US economy neither requires a boost nor a slowing down, hereon.

Of course, rate hikes would continue. But Fed chair Jerome Powell’s stance to use data to determine the magnitude of future rate hikes, instead of offering forward guidance, also cheered investors. This, in the backdrop of easing commodity prices and weakening consumption of goods and services in developed economies, calmed worries of surging inflation.

But then, have the markets factored in a possible recession looming over developed economies?

Anubhav Sahu from MCPro’s research team in this article argues that the macroeconomic slowdown in the region could be steep. The International Monetary Fund scaled down its growth projections for the world economy in FY2023. The US is now slated to grow at 1 per cent compared to its projection of 2.3 percent as per its April update.

Then, there are risks of a recession in Europe, ballooning debt faced by many countries and political turmoil in both the developed and emerging nations.

Adding to this, policymakers may soon be foxed by a resurgence of inflation. Manas Chakravarty in this article draws attention to a study by Moody’s Analytics that demand-pull inflation may offset the gains from easing cost-push inflation that was driven by supply bottlenecks. Further, the article raises a pertinent question: while tightening of monetary policy by central banks will curb spending and demand, isn’t it equally, if not even more necessary, to tighten fiscal policy?

On another note, this FT piece (specially available for MCPro subscribers) ​says that while food prices are falling, global food production and hunger might be even worse in 2023.

Meanwhile, on the home turf, economists believe that the Reserve Bank of India will remain focused on reining in inflation. It is expected to hike rates by 35-50 bps in its August policy, to be announced next week.

In short, there is enough macroeconomic uncertainty around the world. Investors may be better off staying away from all the noise. Don’t miss investment guru Howard Marks' piece where he details why portfolio shifts should not be based on short-term results, as no strategy will make every quarter or year successful.

Investing insights from our research team

Maruti: Is it the right long-term bet now?
Tata Motors Q1 FY23 comes up short
VIP Industries Q1: Making the most of a normal quarter
Colgate Palmolive: Another quarter of subdued performance
Bajaj Finance: Glorious past, dynamic present, poised for brighter future
KPIT: A compelling CASE for long-term investment

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Technical Picks: Fluoro Chem, Crude oil, GNFC, Federal Bank, Bajaj Finserv and USD-INR (These are published every trading day before markets open and can be read on the app)

Vatsala KamatMoneycontrol Pro