Macros improving, Inflation easing further. Is market moving towards a sustained rally?

• In US, consumer price index eased further to 5% in march 2023, down from 6% in February reported US bureau of Labor Statistics inflation report. As Labor market remained strong, “services” inflation proved Stickier, physical goods inflation eased, energy and food prices declined but Housing prices remain high but are expected to fall as demand may fall suggests reports.

• In India, CPI inflation falls to 5.66% in march dropping to 16 month low, after remaining above RBI’s 2-6% band for 2 months. In Feb reported CPI was 6.44%.

• In India, industrial output growth (IIP) grew by 5.6% in Feb ministry of statistics and program implementation data showed, in Jan IIP was 5.2%. Growth in IIP was primarily driven by manufacturing sector, output of which rose by 5.3% against 4% in January.
• In UK inflation eased a bit from 10.4 a month prior to 10.1% in march. Though expectations were of 9.8% but inflation remaining above 10% is worrying for UK central bank.

Fed in it’s last meeting indicated slowdown in rate hikes as inflation is easing, though fed said that they will be data dependent and this month inflation data is suggesting a ease in price as slowdown fear in economy in driving the commodity prices lower.

Fed Minutes suggests flexible moves ahead

Minutes released suggests Chair Powell has backing from all his colleagues broadly to hike rates. Minutes further suggests that policymakers were in the view that the same won’t be necessary in may meeting. After banking turmoil and fear for deep recession, it will be prudent to take decision based on data. Several officials emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the uncertain economic environment.

Still inflation remain above 2% target and job market remain strong leaving room for little firmness in monetary policy but minutes suggest action will be to bring stability. Recent actions in banking sector and slowdown in economy is making fed to factor in a “mild recession” starting this year. It is necessary to access outcomes of rate hikes as they may take some time to produce desired outcome and if further hikes been done in hurry can bring more misery for banks suggests experts.

Street expectations going ahead

Street is divided over weather there should be more hike or a pause. Diane Swonk, KPMG chief economist suggests Fed should take a pause at next meeting. many experts are of similar view. Former Pimco chief economist Paul McCulley said, ” barring a surprise jump in inflation, mounting economic pressure will convince the fed to stop hiking rates next month. Though strong labor market and economic data reported by respective depts suggest more rate hike in future.

Markets are on rally mode, from lows of march most markets are up 20% or more making a case for another bull market but experts are divided on whether there will be one. Data suggests there are at least 4-5 times in bear market where market rallied 20%or more in between just to fizzle out later.

Stocks are flashing signal that a new bull market has begun, says fundstrat

Apart from rising 20% from it’s October low S&P500 has now spent more than 25 weeks above it’s 200 week moving average. Data shows Since 1950, there are zero instances of the S&P making a new low once it’s recovered above the 200 week moving average and spent at least 15 weeks there. Data further suggests this has 100% success ratio, with one, three, six, twelve-month returns being positive every single time the S&P 500 passed the milestone of remaining above it’s 200 week moving average for 25 consecutive weeks.

Expert from Fundstrat believes if inflation keep declining as quickly as expected, the fed will tolerate easing financial conditions. Many experts are of view that bank failures will keep fed’s become too hawkish and this will well resonate with the thoughts of soft landing.

Tracking the Liquidity, Mood is up for “risk on”

Going forward experts see liquidity conditions improving going forward as rate hike pause and rate cut going forward will make the case for liquidity coming to riskier assets from safer ones, this may be the case for rally in Bitcoin and some other cryptocurrencies. We will track Nasdaq for same purpose as in our view it is the best sentiment meter for investors.

Economic uncertainty brought on by high inflation and rising interest rates were major cause driving Tech heavy Nasdaq into bear market back in 2021. Decades high inflation, rapid interest rate hikes, drying liquidity made investors stay away from risky high valuation tech stocks around the globe so Nasdaq was no exception. Even now despite banking turmoil, few more rate hikes are expected. Analysts at JPMorgan Chase expects that will contribute to weak economic growth, raising the bar for a chance of recession at greater than 50% this year. So does this mean bear market throughout 2023? Let’s analyze by data,

Since it’s inception in 1971, the Nasdaq has suffered 18 bear market , let’s understand by a chart details of these 18 bear market (excluding this one as it is yet to end)

This bear market is more than 500 days old and index declined more than 37% till the day bottom was made, (on Dec. 28, 2022), improving liquidity conditions, chances of safe landing, fall in inflation are suggesting we are in for a sustained rally so experts believe this is a good time to invest in market. Nasdaq100 is best gauge to keep the watch on risk taking capacity as it is made of riskier tech companies that slide on first sign of economic uncertainty and last to respond when things start to improve.