Global markets jittery over potential interest rate hikes and inflation concerns

Global markets are grappling with uncertainty as central banks worldwide signal a tightening monetary policy amidst rising inflation fears. On Thursday, European stocks opened lower, echoing the sentiments of Asian markets that fell broadly, with benchmark indexes in Australia, Japan, South Korea and Australia all declining over 1% amid concerns over rising Treasury yields.

The Bank of England (BoE) is expected to announce the final rate hike in the current tightening cycle today, as wages continue to defy the economic slowdown. Central banks in Turkey, Sweden, Switzerland and Norway are also set to make their monetary policy announcements today. The Bank of Japan’s policy statement is due on Friday.

In the U.S., the Federal Reserve left interest rates unchanged as widely expected but raised its forecast for rates at the end of 2023, indicating that the battle against inflation was far from over. Following this announcement, U.S. stocks declined overnight with the losing 1.5%, reaching its lowest closing level in almost a month. The shed 0.9% while the Dow eased by 0.2%.

The Fed’s decision to keep interest rates unchanged in the target range of 5.25% to 5.5% after the Federal Open Market Committee (FOMC) meeting on September 19 and 20 was in line with expectations. However, it signaled a hawkish pause with most officials indicating there could be one more rate hike this year. This has led to a rise in U.S. bond yields and strengthened the dollar.

The yield on the 10-year U.S. bond stood close to 4.4% while two-year bond yields surged up 8.6 basis points to 5.18%. This expectation of higher interest rates for longer than previously anticipated makes emerging markets such as India less attractive to foreign portfolio investors (FPIs), potentially affecting fund flows to these markets.

According to NSDL data, FPIs were net sellers in the Indian markets from September 1 to 20, contributing to market pressure. Despite support from domestic institutional investors, positive foreign fund flows are needed for market gains.

The Fed’s U.S. GDP growth projections indicate a slowdown in 2024. The growth projections now stand at 2.1% for 2023, which may soften to 1.5% in 2024 before recovering to 1.8% in 2025. This potential global economic slowdown could impact sectors such as information technology, chemicals, contract manufacturing, and other export-oriented sectors.

While earlier expectations suggested that interest rates had peaked, the majority of officials now anticipate one more quarter-point hike this year, causing negative market sentiment and extending forecasts of an interest rate cut.

As the day progresses, preliminary consumer confidence figures for the euro zone in September as well as U.S. reports on weekly jobless claims, existing home sales and Philadelphia-area manufacturing activity may further influence trading sentiment.

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