Could Fed's rate hike spoil Dalal Street's rally?
What's the story
The recent softer-than-expected jobs data in the US has led to fluctuating expectations for interest rate hikes this year. Just last week, traders were betting on at least three rate hikes by the Federal Reserve, with the first one in September. However, the latest data has changed these projections. The CME FedWatch tool now shows a 54% chance of a September rate hike, down from 66% earlier.
Market impact
Disappointing job data could delay Fed rate hikes
The ADP National Employment Report revealed that US private employment rose by 98,000 jobs in June, missing the expected increase of 118,000. Non-farm payrolls also fell short of expectations with a mere increase of 57,000 in June against an anticipated rise of 110,000. These disappointing figures could make the Federal Reserve less aggressive about raising rates this year as they focus on controlling inflation within target levels.
Inflation focus
Warsh remains focused on 2% inflation target
Despite the softer job data, Federal Reserve Chair Kevin Warsh remains committed to bringing inflation back down to its 2% target. In May, the inflation figure stood at 4.2%. He noted that risks from inflation have eased as crude oil prices have fallen. The Fed held its benchmark interest rate steady at 3.5% to 3.75% for the fourth consecutive meeting in June and will meet again on July 28-29.
Expert opinions
Analyst sees potential rate hikes ahead
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, thinks high US inflation and rising bond yields indicate possible Fed rate hikes. He said, "The Fed Chief Kevin Warsh's declaration that the central bank will deliver price stability in the US is an indication that the present high inflation rates are not acceptable." However, he also noted upcoming inflation data could heavily influence the Fed's decision on July 29.
Market implications
Impact on Indian market from Fed rate hikes
Experts warn that a cumulative rate hike of over 50 bps this year could affect domestic market sentiment. Shrikant Chouhan from Kotak Securities said while a 25 bps hike won't be concerning, a 50 bps hike this year will have significant implications for the Indian stock market. It could also negatively affect IT services companies due to tighter discretionary spending in the US.