Nomura sees 75bps Fed hike in June, July; markets will absorb it: Analysts

A faster-than-expected rate hike by the US Federal Reserve (US Fed) giving the spiraling inflation in the United States that hit its highest level of 8.5 per cent in March 2022 sent Indian markets into a tailspin on Friday. Federal Reserve Chairman Jerome Powell hinted at a 50 basis point (bps) hike in May.

Those at Nomura, however, are the most aggressive and see the US central bank hike rates by as much as 75 basis points (bps) in its June and July meetings. The markets, they believe, have been reluctant to price 75 bps hikes, but stronger pricing for such a move would likely ease the path for the Federal Open Market Committee (FOMC) and participants could likely forge a consensus on such action quickly.

“We believe momentum for a 75 bps rate hike at some point later this year has increased; we now expect a 75 bps hike at both the June and July FOMC meetings, following a widely expected 50 bps hike in the May meeting,” wrote Aichi Amemiya, Robert Dent and Kenny Lee of Nomura in a recent note.

Following the two 75 bps hikes in June and July, Nomura expects the US Fed to hike rates by 25 bps at every meeting scheduled in 2022 and 2023. Meanwhile, the US Fed had signaled that it will cut its massive bond holdings at a maximum pace of $95 billion a month starting May.

Click here for table: Nomura's key Fed policy assumptions

“This implies 300 bps of cumulative tightening this year, up from our previous expectation of 250 bps, and 75 bps in 2023, down from 125 bps. However, we now expect the terminal rate to be reached slightly earlier, likely by May 2023 rather than July. Finally, our expectation of rate cuts to around 2% in early 2024 remains unchanged,” Nomura said.

So, what does all this mean for the equity markets?

Analysts say the markets are already pricing in the US Fed rate hike, but the quantum of hike and the pace can trigger a knee-jerk reaction. That said, the markets, they believe, will eventually price that in as well and recover lost ground.

“The pace of tightening is the only surprise here. The markets are already factoring in a 25 bps hike. An accelerated pace can trigger some panic, but the markets will eventually price that in. All the US Fed will do is to hike 50 bps four times instead of 25 bps eight times. The 2 – 2.5 per cent level of rate at the end of the hiking cycle is already a given,” explained U R Bhat, co-founder and director, Alphaniti Fintech.

Since their peaks in October 2021, the frontline Indian indices – the S&P BSE Sensex and the Nifty50 - have tumbled around 5 per cent each as investors reassessed their portfolios in the backdrop of what the global central banks, especially the US Fed may do to tame inflation. The Russia – Ukraine war added fuel to the fire as prices of key commodities, especially crude oil (Brent) hit 14-year high of over $140 a barrel.

“The comment by the Fed chief that a 50 bps rate hike is possible in May and that control of inflation has become absolutely essential has pushed the 10-year bond yield above 2.9 per cent. All this impacted equity markets. But this impact, too, is likely to be temporary since the market has already discounted this known hawkishness of the US Fed. What investors should do in this time of high uncertainty is to buy high quality stocks on steep market corrections and wait with patience,” suggested Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

 

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