Markets are wrong on imminent fed rate cuts and what it means for the Indian Market

Markets are in view that fed rate cuts will happen after a pause after another 0.25% rate hike in the May policy meeting bringing terminal rates to 5.1%. Markets are also in view that there will be two rate cuts in 2023 as deep recession and banking turmoil will force fed to cut rate. Is market seeing it right, let’s dig in.

As few economic indicators pointing towards deep recession coming in q3- q4, recent banking crisis and fear of contagion is making a strong Cause for fed pause and rate cut. If not, results will be catastrophic fears markets but is the fed of same view?

Probably not, if St. Louis Fed president James Bullard is to believe, rate hikes can continue further in 2023. He is seeing banking sector problems abating with in months and a return of strong economy going forward leaving more room for fed to play with rates. Speaking in St. Louis he said, “I would put 80% of probability on the case where financial stress abates,” Bullard said, “If it doesn’t abate, that’s a completely different world where financial stress gets more intense, and I would be willing to react to that.”

He said banking system it strong despite Silicon valley Bank and few others fall out, He said problem it no near to 2008 financial crisis and SVB and few others are result of poor management. He sees at least 3 rate hikes from here if banking sector and economy remain strong. Fed already pointed that they are keeping banking trouble and rate hike as different event, rate hikes are for inflation not for banks to get in trouble.

BlackRock strategists are of same view, they pointed that there will be no rate cuts this years as inflation is proving to be more sticky than previously anticipated and may not go away without deep recession. They noted they are watching inflation data, especially this week’s Personal Consumption Expenditures (PCE) Price Index, as well as consumer confidence for more signs of damage from interest rate hikes, higher prices, and the banking issues.

On the contrary, Investment guru Jim Rogers is saying that banking crisis is far from over, He said, ” debt level of the world is far high this time specially for developed economies like America and Japan and this warrants caution, he said soft landing seems a fairy tale to him as he never seen one, He said that interest rates will be much higher before it start easing causing panic all around.”

On banks he said every time it start with small insignificant one’s and later spreads to big one, he further added that financial crisis 2008 started in 2007 with a small bank and later Lehman Brothers happened. Being vocal on different issues He said he in not creating panic but caution as history is suggesting tough times ahead.

Debt to GDP ratio for major economics

World’s debt to GDP ratio increased significantly when compared to 2008 worrying experts left right and center. Many strategists seeing higher debt coupled with higher interest rate as a recipe to disaster. Though India’s debt ratio remains stable coming down from 2008 level but if global meltdown happens will affect India significantly.

So what it means for Indian Stock Markets ?

India being the fastest growing large economy in the world will be shielded from global hustle can’t be the case as our markets went no where from past year. Despite major index Nifty 50 and Sensex not correcting much, broader market corrected almost 50% from the highs. Though not as troubling as in western economies, inflation is higher from RBIs upper tolerance limit from past few months making a case for further rate hike by RBI going ahead.

Though there seems to be relief coming in term of inflation as commodity prices specially crude are in downturn, but slowdown in global economy, possible recession in advanced economies will keep our market on toes. Upcoming q4 results will give an overall idea about cost pressure, margin growth etc specially for probably linked sectors like IT, pharma, metal.

Outlook for Indian IT companies

Though long term outlook for Indian IT companies remain strong problems may come in short term as new orders from Us-Europe may remain subdued for sometime specially from BFS sector as ongoing banking crisis may delay the discretionary spending of banks. many tier-I and tier-II IT companies have significant exposure to BFS sector. Problem may remain till H1FY24 and recovery may happen from H2 FY24. Outlook may significantly change if a deep recession or contagion in banking sector happen.

Most IT companies are on fast lane in term of growth and remain consensus “buy” for long term according to analysts and recent corrections have brought them in “attractive valuation” zone.