Global roundup: Eyes on the Fed! - Views on News from Equitymaster

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Global roundup: Eyes on the Fed!

Jan 29, 2005

In the last one week, while the Indian stock markets have seen a sharp recovery that to an extent has alleviated investors' fears, it is not the case with the global indices. While the benchmark Dow Jones index closed marginally in the positive, Nasdaq and the broader S&P 500 indices closed in the red. While the corporate results season in India has been commendable in the background of higher input cost (commodities and crude oil) and higher capital expenditure plans, it is not the same case as far as the US markets are concerned. While technology majors like Microsoft managed to beat street 'expectations', select pharma and oil companies posted mixed results. Commodity majors, like in India, posted robust results and the outlook remains the one that of positive atleast for the next six months.

As far as the US economy is concerned, the GDP growth slowed in the last quarter as compared to the trend witnessed in the last few quarters. To put things in perspective, GDP growth of the US economy in the fourth quarter was 3.1%, the slowest since the start of 2003 (graph below). At the same time, inflation firmed in the US economy. A price index on personal spending adjusting for food and energy cost rose 1.6% in the fourth quarter. Also, there are reports of upward revision in budget deficits, which is a cause of concern.

Given this backdrop of mixed signals from the US economy, the Federal Reserve is expected to meet next week and it is widely expected that interest rates will be further raised. Though there are speculations as to whether the increase will be faster in the coming meeting close on the heels of the release of the Fed meeting minutes on January 6th 2005, it remains to be seen how the Fed views the broader economic indicators. There are two things to watch out for. One, the stand of the Federal Reserve, which till now has been that of 'measured' increase in interest rate, if required, so as to maintain price stability and secondly, the outlook on the US economy itself.

Overall, while increase in interest rates may be 'expected' by experts, what investors in India have to understand is that this may impact money flow into the country. While January 2005 is too short to conclude whether the selling by the Foreign Institutional Investors (FIIs) will sustain or not, it is likely that a gradual rise in interest rate in the US could have a bearing on money flow. So, all eyes are on the Fed for the moment.

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