The time has come for the share market investors to keep a much closer watch on the incoming economic data. Global investors will be glued to data emerging on inflation, jobs, consumer demand, and GDP growth rate among others to speculate how the US Fed will plan its next moves.
A Fed pivot is what currently matters to the bond and stock markets as US inflation is decreasing but still higher than the objective. Investors may keep their foot on the brake before reaching full throttle if the Federal Reserve maintains a higher rate for a longer period of time. What’s in store in the second half of 2023, only time will tell.
Duc Nam Pho Director at Kama Capital in an exclusive interview with Sunil Dhawan of Financial Express Online talks about various issues – from bond yields, and recession – to what stock market investors may expect over the last three months of 2023. Excerpts.
Headline inflation and in particular, core inflation remains much higher than the Fed’s target. What, in your opinion, are Powell’s most difficult challenges in its efforts to control inflation?
Overall, inflation levels have seen a significant decline, marking a notable shift from their peak. The preferred gauge of inflation data used by the Federal Reserve, the Core PCE index, has now dropped below 4.0% for the first time in over two years although it remains far from its 2% goal. However, the recent surge in oil prices could remain a challenge for the Federal Reserve as it continues to affect consumers’ energy bills, and transportation costs and could affect prices of various products. Additionally, the labor market remains tight and could contribute to sustaining elevated inflation.
When do you see a Fed pivot to happen?
The Federal Reserve is currently expected to start cutting its interest rates toward the second half of next year if inflation continues to decline in a manner that could help the central bank achieve its 2% goal sustainably. However, monetary policy expectations could change in the meantime as the Federal Reserve reacts to developments in inflation, economic growth and labor market as high interest rates continue to weigh on the economy overall leading to its deterioration.
What are the signals emerging from the US bond market?
Recent shifts in bond yields have sparked concerns about the possibility of an economic slowdown or even a recession. Additionally, there is growing apprehension regarding the mounting debt in the United States, particularly in light of the substantial government budget deficit, which resulted in an oversupply of bonds in the US bond market.
A 525-basis points rate hike has been there since early 2022. Is the impact on the US economy visible and how severe will it be in 2024? In short, will there be a US recession in 2024?
The current scenario presents a combination of robust growth rate projections, sustained economic resilience, as evidenced by recent PMI levels, and a stable labor market. These factors are pivotal in guiding the Federal Reserve’s decisions regarding potential shifts in its monetary policy, as the central bank adheres to a data-dependent approach to gauge economic developments. However, maintaining interest rates elevated for a long period of time could affect the economy and raise the probability of a recession next year.
Your take on the US Federal Reserve’s Monetary Policy in 2023.
The Federal Reserve found itself compelled to raise interest rates beyond the 5% threshold to be able to fight high inflation in a more effective manner on the back of a formidable and resilient economy, and a robust labor market. The Fed’s aggressive stance has been effective in lowering inflation although it has exerted significant pressure on the economy. It remains to be seen how the Federal Reserve will opt to drive its monetary policy in the remaining months and how it will react to new economic data releases. However, it is widely expected to maintain interest rates at their current levels.
What should stock market investors expect over the last 3 months of 2023?
The US stock market has been on a decline for more than two months now and could continue to extend losses while the Federal Reserve could leave interest rates elevated for a longer period of time. The possibility of another rate hike by year-end could also weigh on sentiment. High bond yields could also reduce the attractiveness of stocks. However, third-quarter earnings could provide some support to the market if results are better than expected.
There is a significant amount of uncertainty regarding the next steps in US monetary policy and how markets could react. As such, traders could monitor new economic data releases in order to readjust expectations for stocks, bonds, and other assets. Additionally, energy prices could have a significant impact on major economies and monetary policies. As a result, markets could witness significant volatility in the coming months.
