Global financial markets eye US monetary policy next week for fresh cues
US Federal Reserve Chair Jerome Powell recently indicated that it was time for the US central bank to reduce interest rates as inflation rates aligned with its target.
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NEW DELHI: Investors across financial markets, including in India, will look for fresh cues from the outcomes of the upcoming US monetary policy review meeting next week, particularly the extent of interest rate cut, if any.
The US Federal Reserve's next meeting is scheduled for September 17-18, 2024. US Federal Reserve Chair Jerome Powell recently indicated that it was time for the US central bank to reduce interest rates as inflation rates aligned with its target.
Addressing the much-awaited Jackson Hole Symposium last month, Powell said that "the time has come for policy to adjust" but stopped short of hinting at the quantum of interest rate cut. It is most likely that the US central bank will loosen its monetary policy, but investors are monitoring the extent of the cut - shallow or deep. "The September Federal Open Market Committee (FOMC) meeting is expected to be when the US Fed will start lowering rates, though uncertainty persists over how much the Fed will lower rates this year," S&P Global Market Intelligence said in a weekly note.
Investors remained mixed with equal proportions of US equity investors seeing the likelihood for just 50 or 75 basis points worth of cuts in 2024, said S&P Global Market Intelligence. Inflation has been a pain point for the policymakers in the US, who wish to bring retail inflation to 2 per cent on a sustainable basis.
The silver lining is that the latest inflation data (for August) showed that the inflation rate is steadily moderating towards the intended target. "Going ahead, market focus will be on the upcoming FOMC meeting next week, while domestic market direction will also be influenced by domestic corporate earnings, which are forecasted to improve in Q2 on a QoQ (quarter-on-quarter) basis," said Geojit Financial Services.
Foreign portfolio investors seemed to have upped their investments in India, hoping for a better return on investments amid high chances of interest rate cuts in the US. "There are two reasons why FIIs have changed their strategy from selling to buying. One, there is a consensus now that the Fed will start cutting rates from this month onwards pushing the US yields down. This will facilitate fund flows from the US to emerging markets. Two, the Indian market is extremely resilient with strong momentum and missing out on the Indian market would be a bad strategy for FIIs. High valuations in India, however, continue to be a concern," added Geojit Financial Services.
Indian markets surged strongly this week, reclaiming record highs, largely supported by positive global cues. According to Ajit Mishra - SVP, Research, Religare Broking, "Looking ahead, the coming week will be critical with the US Fed meeting scheduled, and its outcome expected on September 18. With a 25 bps rate cut already priced in, a significant market reaction is unlikely. The Fed's guidance on inflation, growth, and future rate cuts will be key in shaping broader market sentiment, particularly regarding global liquidity and risk appetite. A 50 bps cut could spark a positive reaction, especially in emerging markets like India. However, this effect may be short-lived as it could also raise concerns about the underlying strength of the U.S. economy."
Domestically, participants will also be closely monitoring wholesale inflation data. Mishra advised that along with banking and financials, investors must focus on IT, real estate, and metals for long trades while being selective in other sectors.