The US Federal Reserve has joined other major developed-market central banks—the European Central Bank (ECB) and Bank of Japan (BoJ)—in a monetary-policy tightening cycle, with the Fed raising interest rates by 25 basis points as it grapples with stubborn inflation amid a rebound in crude oil prices. According to Standard Chartered's Steve Englander, this decade is likely to see higher rates amid higher inflation, increased fiscal pressure and stiff competition for capital allocation amid the artificial intelligence race. The US 10-year Treasury bond yield climbed 19 basis points to 4.97% last week, while the UK's 10-year gilt closed at 5.35%, near its highest level in decades. Even Japan's 10-year, at 2.99%, is near multi-year highs. The Bank of Japan will announce its interest rate decision on September 18 amid broad expectations that policymakers will raise rates by 25 basis points to 1.25%, a level not seen in over three decades.
The Federal Reserve's September 16 policy meeting has seen rate hike expectations surge to 92.4% following Friday's hotter-than-expected August CPI data and rebounding oil prices. According to Reuters citing CME FedWatch, a hike is now the dominant expectation, and holding rates unchanged would require investors to reassess their understanding of the Fed's response to inflation. Fed funds futures now imply 3.7 rate hikes of 25 basis points each over the next 12 months and 2.4 of them over the next six months. Wall Street has been betting there will be at least one rate hike by the end of the year, with the Fed holding its benchmark interest rate steady while monitoring inflation well above its 2% target. For Indian equities, the market reaction could depend heavily on the Fed's communication and forward guidance rather than the rate decision alone. An unchanged policy rate, or a hike accompanied by balanced guidance, could support a relief rally if investors interpret the outcome as less restrictive than currently feared.
Oil prices have surged past $100 per barrel for the first time since July, as the US-Iran conflict intensified with the strait of Hormuz remaining closed to tanker traffic and Houthi rebels advancing along the Red Sea coast, threatening to choke off Saudi oil supplies. Brent crude settled at $105.83 a barrel on September 16, even after Saudi Arabia offered additional crude cargoes through Oman to ease supply concerns, according to Reuters. The impact is spreading beyond crude, with diesel prices surging, jet fuel and European natural gas prices also rising sharply. European gas prices were around 150% higher than a year earlier, while the continent's gas storage levels remained well below their five-year seasonal average. Global government borrowing costs recently climbed to their highest levels since the 2008 financial crisis, with the average 10-year yield across G7 economies reaching its highest level since mid-2008. US 10-year Treasury yields also moved above 5% earlier this week, creating a challenging environment for economic growth.
Standard Chartered's Steve Englander expects one more rate hike by the Federal Reserve at its December policy meeting, while acknowledging the risk of more hikes than in his base case. As per Standard Chartered, there would be nothing to stop an October hike, but Warsh may hesitate to move just before the mid-term elections. The brokerage expects the extreme hawkish interpretation of the Fed to be rolled back somewhat eventually, with our 2026 core PCE (personal consumption expenditures) deflator forecast at 3.3%. Englander sees the RBI raising rates by 50 bps as higher oil prices and global yields put pressure on emerging markets, with a 50-bps increase in repo rate split equally between the October and December monetary policy review meetings amid a rise in inflation and elevated crude oil prices.
India's economic calendar this week will be dominated by fresh inflation data and updates on the country's external financial position. WPI inflation data for August will be released on September 14, while retail inflation data for the same month will also be published on the same day. According to reports from Business Standard, this comprehensive release schedule will provide crucial insights into price pressures and India's economic trajectory. India's consumer inflation likely rose to a 20-month high in August, driven by higher food and fuel prices, marking a third straight month above the Reserve Bank of India's 4% medium-term target, according to a poll of economists by news agency Reuters. Annual consumer price inflation, based on the consumer price index (CPI), was forecast to rise to 4.80% in August from 4.45% in July, with forecasts ranging from 4.40% to 5.05%. The September 11 inflation report showed headline CPI rising 0.4% month-on-month and holding at 3.4% annually, while core inflation increased 0.3% from the previous month but eased to 2.4% year-on-year. Domestic inflation data (CPI, WPI) and trade figures will remain in focus for the Indian economy, as noted by Ajit Mishra from Religare Broking.
The government will release WPI inflation data for August on September 14, following a marginal decline to 9.78% in July from a series-high 9.87% in June under the new 2022-23 base year series. As reported by Business Standard, the moderation was mainly due to a sharp fall in energy price inflation, which offset higher prices of food, primary articles and manufactured goods. Fuel and power inflation fell significantly to 20.05% in July from 27.41% in June, while crude petroleum and natural gas inflation declined to 26.99% from 34.75%, and mineral oil inflation fell to 32.4% from 46.48%. The latest September 11 inflation report showed headline CPI rising 0.4% month-on-month and holding at 3.4% annually, while core inflation increased 0.3% from the previous month but eased to 2.4% year-on-year. Domestic data, including WPI inflation and trade figures, will provide additional clues on how much of that pressure is filtering into the economy, according to Hariselvan Radhakrishnan from HST Wealth.
