US Fed decision key driver for markets movement this week — 75 bps hike expected

The US Federal Open Market Committee's (FOMC's) next meeting on September 21 is set to drive the equity markets. Equity benchmarks will also continue to be guided by foreign fund movement and trends in Brent crude oil.

The FOMC holds eight meetings during the year. Many experts expect the US Fed to raise rates by 75 basis points (bps).

However, Aichi Amemiya of Nomura told CNBC-TV18 that materialising upside inflation risks will likely result in the Fed raising rates by 100 bps at the September FOMC meeting, above Nomura's previous forecast of 75 bps.

"Beyond September, we continue to expect a 50 bps hike in November, but now anticipate another 50 bps hike in December, 25 bps higher than our previous forecast. With our February 2023 expectation of a 25 bps hike unchanged, our terminal rate forecast now stands at 4.50-4.75 percent, 50 bps higher," Amemiya said.

After the Jackson Hole meeting, Eric Fishwick of CLSA told CNBC-TV18 that the tone of US Fed chair Jerome Powell's speech suggests no change to the brokerage firm's 2022 rate forecast.

"This is either a 50 bps or 75 bps move at the September 21 FOMC meeting (the market is discounting 50 bps) and then a reversion to 25 bps per meeting in November and December (the market is discounting a little more than this)," Fishwick said.

"This would leave the Fed funds rate ceiling at either 3.5 percent or 3.75 percent at the end of this year, depending on the September increment. However, we do not expect any rate cuts in 2023," he added.

Last week, Powell emphasised the importance of getting inflation down before the public gets too used to higher prices. “History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done,” Powell said during the last scheduled public appearance before the Fed’s next meeting as per a CNBC report.

Global markets will also move in anticipation of the Bank of England raising its interest rates. Last week, the Sensex shed 952.35 points or 1.59 percent, while the Nifty fell 302.50 points or 1.69 percent. The 30-share BSE Sensex had tanked 1,093.22 points or 1.82 percent to settle at 58,840.79 on Friday, September 16, mirroring a sell-off in global markets.

Despite its strong decoupling scenario and encouraging macroeconomic data, domestic bourses succumbed to the global trend of rising bond yields and the dollar index due to rate hike fears in the global market, Vinod Nair, Head of Research at Geojit Financial Services, told PTI.

Chetan Seth of Nomura, meanwhile, told CNBC-TV18 that Powell’s hawkish speech would weigh on sentiment towards Asian stocks. "But some local buffers exist, i.e. modest valuations – bar India/Thailand; investor positioning is light, and the sentiment is generally low, especially towards larger North Asian markets; strong corporate balance-sheets; whilst China is accelerating stimulus to boost the local economy )."

As per Seth, local risks to watch would be China’s continued Zero COVID strategy, geopolitical tensions around China/Taiwan, and the extent of earnings downgrades, particularly in semi/memory/tech-hardware names that will depend on the timing/duration/depth of a likely US recession.

Apurva Sheth, Head of Market Perspectives, Samco Securities, told PTI Fed’s interest rate decision can trigger jitters in global markets, and though India has done significantly better than all the other major markets, it is expected to remain volatile.