Fed rate hike impact on Sensex, Nifty, INR & 10 Year G-sec:
The Fed removed the word accommodative from its policy statement during its September policy-meeting and continued to hike rate in the FOMC Meet that ended on 19th December 2018. The Fed take the target range for its benchmark funds rate to 2.25% to 2.5%. The move marked the fourth increase in rate hike this year and the ninth since it began normalizing rates in December 2015. Central bank officials now forecast two hikes next year, down from three rate raises previously projected. However, the Fed continues to include in its statement that further “gradual” rate hikes.
Dow, S&P 500 and Nasdaq all hit new lows for 2018 after the Fed hiked interest rates. The major indices rolled over after Fed Chair Powell said the central bank would continue to shrink its balance sheet, tightening financial conditions. The Fed failed to sound like it was ready to pull back from its tighter policy path as much as markets had expected which led to sharp fall in share price of bellwether stocks on 19th December 2018. 10 Year UST bond yield decreased to a 37-week low of 2.7584%.
The impact of Fed rate hike and guidance on Indian markets is more as a part of wider issues rather than the single driving force for the markets. The 10 year Gsec yield has risen due to factors such as FII selling, advance tax outflows to tighten liquidity and drama in RBI with resignation and appointment of governor. Sensex and Nifty have gained momentum after sharp fall in Crude oil prices and India Inc reporting stronger industrial output which rose by 8.1% from a year earlier in October 2018, following a 4.5% growth in the previous month and beating market expectations of 5.7% advance. Consumer inflation in India declined to 2.33% in November 2018 from an upwardly revised 3.38% in October 2018 and below market expectations of 2.8% has also improved investors sentiment in domestic markets.
The Fed rate hike adds on to the negatives surrounding the market at present, and RBI in the recent policy meeting stated policy stance is calibrated tightening (Click here to read our RBI December Policy Review). Political risk will also keep markets on the edge as the current government has lost important state elections which could impact the outcome of 2019 general elections. We expect Sensex, Nifty to stay volatile and INR to stabilize around Rs 70 to the USD.
Factors for fed rate hike:
- The US labor market has continued to strengthen and economic activity has been rising at a strong rate. Job gains have been strong in recent months and the unemployment rate has stayed low. US unemployment rate was at 3.7% in November 2018.
- The US economy growth expanded at an annualized rate of 3.5% during Q3Fy18, inline with market forecasts.
- Annual inflation rate in the US fell to 2.2% in November 2018 from 2.5% in October, matching market expectations. It is the lowest reading in four months amid a slowdown in cost of fuel, gasoline and shelter.
- Corporate profits in the US increased by USD 47.3 billion (2.4% Y-o-Y), to an all-time high of USD 2,012.6 billion during Q2Fy18, following a 8.2% jump in the previous period and missing market expectations of an 8.6% advance. Increase in corporate profits shows the increase in demand for US products (manufacturing & service) globally and uptick in expenditure patterns of US citizens.