Stock market cues: First Fed rate cut off the table, says Morgan Stanley
Share market cues: Morgan Stanley said improving productivity growth, rising investment rate, and inflation tracking above the target of 4 per cent, alongside a higher terminal Fed funds rate, warrant higher real rates.
- Apr 16, 2024,
- Updated Apr 16, 2024 11:23 AM IST
Morgan Stanley in its latest note expects no Fed easing in its forecast horizon, thanks to change in the US Fed rate path and strong growth, both warranting higher neutral real rates. Morgan Stanley's Chief US Economist Ellen Zentner updated her outlook for the Fed policy path, reflecting stronger growth amid volatile inflation data.
The updated Fed path , Morgan Stanley said, reflects a delayed start to the easing cycle, with the first rate cut in July 2024. It earlier anticipated the first rate cur in June. Overall, Morgan Stanley sees three Fed rate cuts in 2024 from four previously, and a shallower easing cycle with a cumulative 175 basis points of easing (against 300 bps previously) through 2025.
"Indeed, a higher terminal Fed funds rate with strength in the US dollar (DXY index has gained 4.5 per cent YTD) would warrant a cautious stance from the RBI," said Morgan Stanley's India economists Upasana Chachra and Bani Gambhir.
The India economists said strong growth trend domestically, driven by capex and productivity, implies that rates could be higher for longer. They said the growth trend has been surprising on the upside over the last four quarters, with sustained momentum in capex and industrial activity.
"Further, leverage pickup is accelerating, as reflected in higher credit growth tracking at a robust 16.3 per cent in March 2024 vs pre-pandemic growth of 7.1 per cent YoY. We believe that the current cycle is similar to the 2003-07 cycle with pickup in capex and productivity. As such, real policy rates averaged 1.9 ppt over 2003-2007," the Morgan Stanley economists said.
Morgan Stanley said improving productivity growth, rising investment rate, and inflation tracking above the target of 4 per cent, alongside a higher terminal Fed funds rate, warrant higher real rates. As such, it expects no easing in policy rates in 2024-2025 with the RBI policy rate steady at 6.5 per cent, implying real rates to average 200bps.
"In our view, risks stem from a weaker-than-anticipated trend in growth or faster-than-expected moderation in the inflation trajectory, either of which may prompt the RBI to embark on a rate easing cycle. On the other hand, escalated geopolitical tensions and/or supply-side-driven sustained increase in commodity prices (especially oil), leading to a deterioration in macro stability indicators, would warrant a more hawkish stance. However, the bar for any rate hikes will be high," it said.
Morgan Stanley in its latest note expects no Fed easing in its forecast horizon, thanks to change in the US Fed rate path and strong growth, both warranting higher neutral real rates. Morgan Stanley's Chief US Economist Ellen Zentner updated her outlook for the Fed policy path, reflecting stronger growth amid volatile inflation data.
The updated Fed path , Morgan Stanley said, reflects a delayed start to the easing cycle, with the first rate cut in July 2024. It earlier anticipated the first rate cur in June. Overall, Morgan Stanley sees three Fed rate cuts in 2024 from four previously, and a shallower easing cycle with a cumulative 175 basis points of easing (against 300 bps previously) through 2025.
"Indeed, a higher terminal Fed funds rate with strength in the US dollar (DXY index has gained 4.5 per cent YTD) would warrant a cautious stance from the RBI," said Morgan Stanley's India economists Upasana Chachra and Bani Gambhir.
The India economists said strong growth trend domestically, driven by capex and productivity, implies that rates could be higher for longer. They said the growth trend has been surprising on the upside over the last four quarters, with sustained momentum in capex and industrial activity.
"Further, leverage pickup is accelerating, as reflected in higher credit growth tracking at a robust 16.3 per cent in March 2024 vs pre-pandemic growth of 7.1 per cent YoY. We believe that the current cycle is similar to the 2003-07 cycle with pickup in capex and productivity. As such, real policy rates averaged 1.9 ppt over 2003-2007," the Morgan Stanley economists said.
Morgan Stanley said improving productivity growth, rising investment rate, and inflation tracking above the target of 4 per cent, alongside a higher terminal Fed funds rate, warrant higher real rates. As such, it expects no easing in policy rates in 2024-2025 with the RBI policy rate steady at 6.5 per cent, implying real rates to average 200bps.
"In our view, risks stem from a weaker-than-anticipated trend in growth or faster-than-expected moderation in the inflation trajectory, either of which may prompt the RBI to embark on a rate easing cycle. On the other hand, escalated geopolitical tensions and/or supply-side-driven sustained increase in commodity prices (especially oil), leading to a deterioration in macro stability indicators, would warrant a more hawkish stance. However, the bar for any rate hikes will be high," it said.