No relief for markets as Fed gets aggressive to tame inflation: Chris Wood

Markets are likely to remain under pressure and may not get any relief in the short-term as the global central banks, especially the US Federal Reserve (US Fed), gets aggressive in a bid to tame surging inflation, wrote Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.

Rising inflation and steep rate hikes amid geopolitical concerns have already dented equity market sentiment across the globe. The S&P 500 is now down over 20 per cent year-to-date, data show. The DJIA and the NASDAQ, too, have slipped 13 per cent and 28 per cent during this period. Back home, the S&P BSE Sensex has shed around 8 per cent YTD amid weak global cues and rising inflation.

“The only possible source of relief for Wall Street-correlated world stock markets, save for a Fed U-turn, would be a sign that US inflation has peaked and is coming down sharply. This is clearly not yet the case. Rather the announcement of the June CPI data point on Wednesday will likely lead to the Fed announcing another 75 basis point (bp) rate hike on July 27,” he said.

The latest consumer inflation (CPI) print in the US for June came in at 9.1 per cent - the highest reading since 1981, and surpassed most analysts' expectations, who had pegged this at 8.8 per cent. Earlier in June, the US Fed had hiked interest rates by 75 bp, the biggest hike in 28 years, in a move to cap this inflation.

The recent print of 9.1 per cent has made analysts raise the bar on how much the US Fed will hike in its policy meeting on July 27. Besides Wood, who sees the US central bank hiking rates by another 75bp by the end of July, analysts at Rabobank International and Nomura, too, have a similar view.

"Overall, it seems to us that it would now be a shock if the Fed did not hike rates by 100bp in July. The peak of the Fed Funds rate is now expected at 3.56 per cent and this will come in December 2022 whereas previously it was expected to be 3.45 per cent in February/March 2023," analysts at Rabobank wrote in a recent note.

Nomura, on the other hand, expects the US Fed to hike by 75bp in July, 50bp in September and 25bp each in November and December and February 2023. With growth momentum rapidly decelerating, they expect a recession in the US to begin in Q4-2022, with risk of an earlier start.

As regards Indian markets, some respite, however, is seen on the back of commodity prices cooling off. But with rupee under pressure, the gains here too will be capped, believe analysts. Those at UBS, for instance, see the CPI in India to start easing off from October, but still remain above Reserve Bank of India's (RBI’s) upper tolerance band of 6 per cent.

“We believe India being a net global commodity importer will benefit from recent correction in global commodity prices but rupee depreciation risks need to be monitored closely. We expect these factors to help limit the upside risks to our full year FY23 CPI inflation forecast of 7 per cent YoY. In our base case, we expect the monetary policy committee (MPC) to hike repo rate by another 25-35 bp in the August policy,” said Tanvee Gupta Jain, an economist at UBS.