Equity markets across the world are on a strong rise after the US Federal Reserve meeting outcome on Wednesday. The Dow Jones Industrial Average in the US had surged over a per cent on Wednesday to close at record highs. The Indian benchmark indices, Sensex and Nifty 50 are also at new highs today.
On one side the risky assets such are the equities are celebrating the Fed meeting outcome whereas the US dollar and the Treasury yields have been knocked down badly. The dollar index has tumbled from around 104 on Wednesday to 102.60 now. The US 10Yr Treasury yield has tumbled from around 4.2 per cent to 3.98 per cent now.
The trigger
The Fed left the interest rates unchanged at 5.25-5.5 per cent in line with the market expectation. But the major change was in their outlook for 2024. The central bank’s economic projections showed that there will be a 75-basis points rate cut next year. The Fed projects their median fund rate to be at 4.6 per cent in 2024, down from 5.4 per cent this year. In September, the Fed had projected the median fund rate to be at 5.1 per cent for next year. In addition to this, the projections show that the median fund rate to be at 3.6 per cent in 2025 – a full per centage point (100-basis points) cut. The projection for more rates in 2024 and 2025 has triggered the rally in the global equities
Inflation outlook
“Inflation has eased from its highs, and this has come without a significant increase in unemployment. That is very good news”, said Jerome Powell, the US Federal Reserve Chairman in his opening statement in the press conference. The central bank seems to be acknowledging the easing inflation. Apart from the rate cuts projected in the future, the inflation forecast for the coming years also have brought cheer to the market.
The Personal Consumption Expenditure (PCE), the Fed’s inflation gauge is projected to be at 3.2 per cent this year and come down to 2.4 per cent in 2024. In September the Fed had a forecast for the PCE as 3.7 and 2.6 per cent for 2023 and 2024 respectively.
Equities outlook
The Dow Jones (37,090.24) had closed at a new high on Wednesday. The outlook is bullish. Strong support will now be around 36,000. The Dow Jones has potential to target 38,500 and 39,500 in the coming months.
On the domestic front, the Nifty 50 touched a new high of 21,189.55 today. It has come down slightly from there and is currently trading at 21,183. Nifty has strong support around 20,500. Outlook is bullish to see a rise to 21,700.
More room to fall
The US dollar index (102.60) and the US 10Yr Treasury yield (3.98 per cent) are looking weak and vulnerable to fall more. The dollar index can test 102-101.50 in the short-term. A break below 101.50 can drag it down to 100.
The US 10Yr Treasury yield on the other hand has room to fall up to 3.8 and even 3.6 per cent from here.
Rupee outlook
Amid all the volatile moves across the asset classes, the Indian Rupee (USDINR: 83.34) continues to remain broadly stable within its range. The domestic currency has been stuck in between 83 and 83.50 against the dollar for a prolonged period of time. Failure to strengthen today even after the sharp fall in the dollar index keeps the outlook mixed. The rupee can continue to oscillate between 83 and 83.50. A breakout on either side of this range will determine the next move.