Moneycontrol Pro Panorama | Which way will Jay walk? 

The main attraction of the week is the US Fed’s decision on interest rates and chair Jerome Powell’s comments and press conference.

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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. 

This week, traders and investors will be distracted a bit from their focus on the domestic economy by the upcoming US Fed rate decision. Last week, the European Central Bank increased rates by 25 basis points (bps) to a record 4 percent, but also said it now believes rates have reached a level that would help bring inflation back to targeted levels. That has led to a view that this was the last rate hike in the current round, but then there were many who got last week’s rate decision call wrong too.

The Bank of England too has a rate decision lined up for this week, and a Reuters poll expects it to be the final one in this cycle that will take the bank rate up by 25 bps to 5.5 percent, the highest since 2007. An economic slowdown in Europe is expected as the central banks’ effort to cool down an overheating economy bears fruit and brings inflation lower.

While these will indeed be watched, the main attraction of the week is the US Fed’s decision on interest rates and chair Jay Powell’s comments and press conference. Will the markets get it right, will economists score a win? Stock markets appear to have turned sanguine in their view of interest rates, interpreting economic data to support a case for a continuing pause on rate hikes. The S&P 500 is up 12.6 percent in the past six months and is up 1.8 percent from a month ago.

But economists are going out on a limb with their view that the Fed will raise rates by at least 25 bps. An FT-Booth survey of economists says the Fed needs to a lot more work to lower inflation, according to this FT selection (free to read for Pro subscribers). Of the 40 respondents polled, about 90 percent believe there is more work to be done, with half expecting rates to peak after rising by 25 bps, but a sizeable 35 percent think one more rate hike is in order. And, once rates peak, the Fed will hold them there for a considerable period of time, with 60 percent thinking the first rate cut could come only in the third quarter of the next year.

The actual outcome of the FOMC’s deliberations will be known in a few days, so there’s no real point in any hand-wringing at this point. But markets do set store by rate decisions and in their absence, keep an ear open for soothing words from the Fed chair, that assures them that the worst of rate hikes are behind them and that rising stock valuations are not wrong in discounting a rosy scenario where inflation has cooled, growth has moderated but is still healthy, and rate cuts are available as a tool to support growth when the need arises. It’s fairly likely they will hear what they want to hear, as the Fed wants to go about its work without causing chaos in the financial market.

While domestic investors will pay some attention to these events, to the extent the same could affect foreign portfolio flows, their main attention is likely to be on the earnings season that will start rolling out in less than a month from now. The run-up in equities especially in mid and smallcaps that have seen sizeable appreciation, is one that calls for a reality check. Whether the earnings season throws up enough reasons to justify the rally in these stocks is the question they will want to seek answers for. A satisfactory response could mean these counters will continue to notch up gains, but if earnings don’t support the optimism then the mayhem that could follow will be an ugly sight. On the brighter side, this fund manager thinks India’s capex cycle is in a sweet spot, read to know why.

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