What happens next week could be more important than what happened last week?
On Friday, the Indian market recovered but it appears to be a relief rally at best - relief from the sharp wealth erosion witnessed in the previous trading sessions of the week.
A closer look at the way U.S. markets closed on Friday suggests the fear factor could revisit the markets when trading resumes on Monday. Selling pressure resumed and caution and uncertainty are back. Here's why:
The U.S. Federal Reserve is meeting next week to decide the next course of action. Words more than deeds is what the markets are going to watch! Slowing down the U.S. economy and bringing the inflation within its target of 2% is what the U.S. Fed is focussed on. The latest economic data released last Thursday showed the U.S. economy grew better than expected.
When the U.S. 10-year treasury yield crossed the 5% mark, it unleashed a wave of selling across markets. The yield has dropped slightly below the 5% mark, but the strong economic data has put paid to hopes of the Fed changing its tone. This spooked the U.S. markets once again on Friday.
The Bank of Japan meeting could be the week's wildcard as there is growing speculation of some policy tweaks. Note that the BoJ has been so far slow to hike interest rates and kept them at negative. And also note that the Japanese yen is one of the most liquid currencies in the world.
If even the most dovish central bank in the world starts hiking rates, or talks in a language which makes people believe about a future set of hikes, the speculations for U.S. Fed to hike will run wild too! And since the Fed follows the BoJ this week, it becomes all the more important.
Also, this BoJ meet and the Fed meet are preceded by the minutes of the Fed meeting which changed the language on economic activity from 'moderate' to 'solid.'
In their discussion of monetary policy for this meeting, members agreed that economic activity had been expanding at a solid pace, and, accordingly, that the corresponding language in the post-meeting statement should be changed from 'moderate' to 'solid'.Minutes of FOMC Meeting Sept 19-20, 2023
The third quarter U.S. GDP numbers have reinforced this language and now the markets are worried the higher for longer will be 'much longer' if not a hike in the next policy.
Clearly, the Fed and the U.S. market behaviour will determine the course of action elsewhere.
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