The two-day monetary policy meeting of the US Federal Reserve begins later on Tuesday, and at the end of it, the central bank is widely expected to leave the federal funds rate unchanged.
The CMEGroup’s FedWatch tool shows that more than 98% probability of the Federal Open Market Committee leaving the federal funds target range at 5.25-5.50%.
If done, this will be the third consecutive time that the Fed keeps interest rates on hold.
According to the projections by Fed officials made in September, the federal funds target range was seen at 5.50-5.75% in December, but thanks to easing price pressures that prompted the central bank to stay put on rates.
However, a possibility of Fed chairperson Jerome Powell offering a dovish view on the interest rate trajectory for 2024 has somewhat waned, following the stronger-than-expected payrolls report for November.
The US labor market strengthened in November, with a pickup in employment and wages, which diminished hopes that the Federal Reserve will cut interest rates early next year.
Data released by the Labor department showed that US employers added more jobs than expected, while the unemployment rate unexpectedly fell in November.
The nonfarm payrolls increased by 199,000 last month, following 150,000 in October. The unemployment rate fell to 3.7% from 3.9% in October.
“The acceleration in payrolls is at odds with recent reports that have depicted a softer hiring pace, an outcome favoured by the Fed as it will help rein in consumer spending demand and tame price pressures,” said Amit Goel, co-founder and chief global strategist, Pace 360.
“The surprisingly hawkish NFP (nonfarm payrolls) drastically reduces any chances of the Fed singing a dovish tone,” Goel said.
On the inflation front, there was some relief for investors and will possibly be for the Fed too.
In October, headline consumer price inflation eased to 3.2% in October from 3.7% in September, on the back of a 2.5% decline in energy prices. Meanwhile, core inflation, which excludes highly volatile food and energy components, was 0.2% higher in October after rising 0.3% in September.
Market Performance Since Last Meet
Whether it’s equities in the US or India, stocks have rallied sharply since the last meeting of the US Fed on October 31-November 1.
The benchmark Dow Jones Industrial Average index has surged 7%, whereas the Nifty 50 has outperformed by gaining close to 11%.
Easing bond yields and the dollar index have been two of the major factors that have driven the risk-on sentiment in equities.
While the Dollar index net lost 2.4% since the Fed’s last meeting, yield on the benchmark US 10-year treasury note has eased to 4.23% from 4.66% levels.
This rally in equities has largely priced in a status quo policy action by the Fed, so the sustenance of the momentum largely hinges upon what Powell is likely to guide for 2024.
“Unless the Fed this week manages to come up with a hawkish surprise, the soft-landing theme should continue to support some larger stock markets in AeJ (Asia ex-Japan) such as Korea, Taiwan and India…,” said Nomura Financial Advisory and Securities.
Economists at Nomura expect median 2024 rate projections to show three rate cuts, which will see the target rate coming to 4.625% by the end of next year.
Meanwhile, equities in India are already riding high on the back of the domestic euphoria surrounding political stability, strong growth and corporate earnings.
On Monday, the Sensex topped the 70000-mark for the first time ever, and the Nifty 50 moved past the 21000-milestone.
After the strong upmove since the beginning of December, analysts anticipate some consolidation ahead of the Fed meet outcome. But, they remain bullish on the market.
“We believe the current undertone of markets being bullish in the past few weeks, may see some cool off, and we may see markets consolidating in the next few sessions,” said Avdhut Bagkar, technical and derivatives analyst, Stoxbox.
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