Dear Reader,
There are two weeks left to see if Santa Claus will visit investors who are long equities or skip this year. But headlines are punting he won’t visit, looking at how the week that just ended has played out.
US markets finally appear to have capitulated — no, don’t worry, not that one where the tide goes out — to Jerome Powell’s view of how 2023 is going to look like. Thus far, even as the Fed reiterated its hawkish stance, through various statements and even in speeches by officials, markets had their eyes on the rosier times ahead. Markets rightly determine that rate hikes will turn smaller and that inflation is turning softer.
But they were told off by the Fed on their outlook for how much rates will increase and for how long it will stay there. While this message itself was not new, somehow it appears to have become more apparent to the markets now.
Their world view of inflation falling quickly in 2023 to be followed by the Fed lowering interest rates was punctured this week. What may have worried investors? In this article from the Financial Times (free to read for Pro subscribers), the context in which the Fed was meeting and the contrasting outlook held by central banks and investors was sketched out. Bringing inflation down from 7.1 percent to the target of 2 percent without pushing economies into a deep recession is what the Fed wants to achieve, but who knows if that will happen. After all, it believed inflation to be transitory. Given a choice between a recession and higher than acceptable inflation, recession is a lesser evil. The Fed lives in a world of lags and pulls so even if it begins easing, it will take time before the pain inflicted to control inflation abates.
One question is if the 2 percent target is negotiable? Mohamed El-Erian, a critic of the US Fed’s policies, wrote in the FT (free for Pro subscribers) “…it could prove tempting for the Fed to continue to signal a 2 per cent inflation target, but in practice, end up pursuing a higher one…” Will the Fed move away from its stated inflation objective, if it realises that reaching there could break the back of the economy. What will that mean for its credibility? The trap the Fed has got itself into means that the road from here does not get easy, he concludes.
The US Fed hiked interest rates by 50 basis points this week, as expected. There was no pivot but just a shifting down of gears, as Anubhav Sahu noted in his analysis of the Fed decision. The FOMC also raised its inflation projections and also revised up its median policy rate level to 5.1 percent. And, its decision to keep its eyes on rising non-housing services inflation, means it’s not paying much heed to falling goods inflation. A strong labour market makes it difficult to bring services inflation under control, he writes.
In some ways, the market itself may be responsible for Powell’s efforts to hammer any sign of easing being read into the Fed’s statement. In this FT article on the Fed’s messaging, a former Fed official says: “So, he has to downplay any good news on inflation, emphasise the hard work that has yet to be done, and emphasise the pain that will be inflicted.” (emphasis is ours) That message did get through, for sure.
What should investors do, given all these developments? Madhuchanda Dey believes investors should have patience and not fret if they face reversals in the market. Read here to know why. Ananya Roy asks long-term investors to stick to quality in defensive sectors and advises investors to not get carried away by optimism in the markets. Read here for more.
While the week has ended with the Fed uppermost on the mind, it began with the arrest of the FTX founder Sam Bankman-Fried in the Bahamas. Here’s a funny take on that from Twitter.
Cheers,
Ravi Ananthanarayanan
Here are some of the stories and insights we published this week, apart from our technical picks in the equity, forex and commodity markets
Stocks
Weekly tactical pick, Sula IPO, HUL, Railway engineering stocks, Paradeep Phosphate, Apcotex, Dalmia Bharat, ZFCV, Godrej Consumer, EIH, Colgate-Palmolive, HAL, Heritage Foods, Gas sector
Markets
Equity funds losing flavour, is debt making a comeback?
Indian equities face short term headwinds, but long term outlook appears bright
Investing when good news is bad news for the markets
Silver – A dark horse
Economy
Core inflation stays sticky, IIP data for consumer goods alarming
Chart of the Day | WPI data point to softness in manufacturing
India’s PLI scheme can spur industrial growth, but what about jobs?
Economic Recovery Tracker | Consumer sentiment declines, active workforce goes up
Financial Times
Decoupling wave creates new business opportunities, gives leg-up to transparency
End of ‘fantasy’ stock market brings relief and pressure for short sellers
Why has Big Tech fallen in love with exchanges?
Policy
Returning to the old pension scheme is a retrograde step
Union Budget 2023: Why India’s plantation sector needs a budgetary leg-up
Time to untangle regulatory knots for directors’ remuneration
Geopolitics
The Eastern Window: US stepping up efforts to corner China in high-tech space
Companies and industry
India data stoke sales optimism for pharma companies
A $ 9 billion contract for US firms has ramifications for Indian IT services
Higher rabi sowing may yield limited gains for agrochemical companies
Colgate’s share price tumble post-analyst meet seems overdone
In the global race for fabs Indian companies need to be faster to market
Renewable energy rush fails to illuminate solar parks
Block by block: Cement sector is consolidating. What are the forces at play?
Others
Personal Finance: How did your financial investments perform in 2022?
A private sector chief for LIC may not be an easy deal
Marketing Musings | Digital trends have changed life for consumers, marketers alike
Start-up Street | Funding winter will change life for stakeholders?
