US stock market, rate hike and recessionary fears: All that you need to know

The risk of a recession in the US has increased and the next six months could be crucial for the stock market investors.

US stock market, rate hikes, recession, inflation, investing, US FED
Although the Fed expects the inflation to move lower in 2023, the effect of the Fed’s actions on the broader economy remains uncertain.

What was only transitory is now the priority for the global central banks. Inflation is rattling the stock market investors worldwide. With US Fed hiking interest rates in succession, the quantum of next few rate hikes remains to be seen in light of upcoming inflation data.

Many experts are expecting a milder recession and a soft landing after rate hikes but that may largely depend on supply chain concerned easing out and fall in commodity prices.

How the stock amrket reacts on the various demand and supply indicators amidst the inflation data will determine the long term path for the investors. Both S&P 500 and Nasdaq are in bear market territory after falling 20 per cent from their recent highs.

The battle between the US Fed and inflation seems to have just begun. How it plays out and how much damage it brings to the economy remains to be seen.

For latest updates on US Stock Market, click here.

Here are some views of industry experts who keep a close eye on the global markets.

Arvind Chari, CIO, Quantum Advisors

Some Central Banks seem to be in a hurry this year. The US FED has hiked rates by 150 bps between March and June.

Most Central Banks spent the latter part of 2021 by initially ignoring inflation to remain growth supportive, then hoped that inflation would be ‘transitory’. They recognised its severity and began acting on it, however, they would wish and pray now for some divine intervention.

‘Festina Lente’ which means ‘make haste slowly’ in Latin., is an oxymoron. The Central Bankers, given how much they had mollycoddled the markets, wanted to act on inflation but at a measured pace.

In the latter part of 2021 and the pre-war months of 2022, they spent on communicating that they will hike but at a measured pace. They did not want to rock the markets. That approach is not working.

They are now in Operation Warp Speed and are not only shocking the markets but also are unable to convincingly guide on future expectations.

The FOMC now forecasts the median FED Funds rate (based on the ‘dot-plots’) to be 3.4% by the end of 2022, this would mean a total of 200 bps (2.0%) rate hikes in the next four scheduled meetings.

In March 2022, the median FED Funds rate for 2022 as per its own forecast was to be 1.9%. In 2023, they expect the median rate to be 3.8%, up from 2.8% in the March forecast.

This is hiking in stealth. Something that the markets are already kind of priced for. The 2-year US treasury bond yield (which rose a lot last week) is now well above 3% and so is the US 10-year bond yield.

The challenge for the Central Bankers is this – if commodity prices do not correct, the entire onus on dealing with inflation will be with the central bank. The only tools they have is higher interest rates and tighter liquidity.

The FED expects that a FED Funds rate averaging 3.5% over the next 2 years will be enough to get inflation back to its 2% range with some growth sacrifice but no major increase in unemployment. If this happens, great.

Long bond yields will fall, and equities will trend higher. This is what they term, a soft landing. Markets are currently priced for a soft-landing scenario.

If it doesn’t play out that way, we are in some trouble. If PCE inflation (FEDs measure) falls only to 4% in 2023 from the current levels of 5.5%, it would force the FED to hike way more than current expectations and tighten its balance sheet at a faster pace. This would mean higher bond yields, weaker equities, and an economy’s path towards recession. A hard landing.

In Equities, near-term concerns dominate. However, an increase in formal employment, a recovery in residential real estate, better control over farm prices, and a healthy corporate/bank balance sheet suggests that medium-term cyclical recovery will continue despite near-term headwinds. Stock market corrections will remain an opportunity to add to your long-term portfolio.

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Mahavir Kaswa, Head Research- Passive funds, Motilal Oswal Asset Management

Since the beginning of 2022, Fed has been trying to reduce the money supply by going for aggressive rate hikes. Continuing on the expected path, the Federal Reserve decided to raise the interest rate by 75 bps taking the Fed Funds rate in the range of 1.5%-1.75%. The 75bps rate hike is the highest since 1994.

Despite a hawkish move by the FED, the S&P 500 and Nasdaq 100 advanced by 1.4% and nearly 3% respectively, even yield of 10-year US treasury softened by 6 bps to close at 3.44%.

Taking cues from the FOMC statement, we expect aggressive rate hikes going forward to ease inflationary pressures. However, chairman J. Powell also noted that he does not expect a 75bps rate hike to be a common thing going ahead.

The FED members expect rate hikes to the tune of 175 bps during the remainder of 2022. One way to look at this is a 75 bps hike in July followed by a 50 bps and 2 X 25 bps in the remaining three meetings. It will be prudent to acknowledge that the rapidly evolving situation will guide the actions of FOMC and shall be sensitive to new realities.

Pranjal Kamra – CEO, Finology Venture

The Federal Reserve hiked the interest rate by 75 basis points, apparently the highest in some three decades. This didn’t come as a surprise if you look at the worsening inflationary pressure. While the rate hike could help; word has it, a ‘mild recession’ is on the cards.

Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Service

In a dramatic shift in gears, the US Federal Bank stepped up the rate hike by 75 bps, biggest since 1994, along with a pledge to do ‘whatever it takes’ to tackle inflation.

Fed Chairman Jerome Powell recognised that the path to curbing inflation while maintaining the growth momentum in the economy is “not getting easier. It’s getting more challenging.”
While the pace of hike itself is aggressive, it was largely priced in by the markets after Friday’s inflation data was announced at record levels.

In addition to the hike, Fed’s forecast – ‘the dot plot’, which in December showed expectations of Fed funds rate barely topping 1% this year, is now unanimous in forecasting 3%+ levels.

With the next Fed meeting planned in July itself, there is a high possibility of another hike of 50-75 bps, being acknowledged by the Fed chair too.

This is in line with the commitment to bring inflation to the target 2% and remarks around being highly attentive towards growing risks from higher inflation.

Interestingly, the statement from the previous Fed meeting saying “Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.” to now saying “The

Committee is strongly committed to returning inflation to its 2 percent objective.” Clearly highlighting that for now, their priority is limiting inflation.

While the initial reaction from US markets has been positive, two hours of post announcement trades might be early to extrapolate the market reaction.

Further, with a downward revision in GDP forecast for 2022 to 1.7% from 2.8%, the fears around recession are likely to grow.

Accordingly, while the Fed expectations are of a ‘soft landing’ without recession, it looks incrementally difficult to contain inflation without aggressive tightening which is likely to have a larger impact on margins, borrowing cost and overall demand.

Mohit Ralhan, Managing Partner at TIW Capital Group

The central banks across the globe are playing catch up with inflation and making efforts to race ahead of the curve.

The 75-basis point increase by the Fed and more importantly the upward revision of 1.5% in the expected year-end rate indicates that inflation is winning the battle as of now.

The Fed also significantly cut its outlook for 2022 economic growth to 1.7% down from 2.8% in March. The risk of a recession in the USA has increased and the next two quarters will be extremely crucial.

Although the Fed expects the inflation to move lower in 2023, the effect of the Fed’s actions on the broader economy remains uncertain. The markets are expected to remain quite volatile as it tries to find the balance between economic growth and high inflation.

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First published on: 16-06-2022 at 17:57 IST