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Global investors are still reluctant Eventhough Inflation is easing

Expectations that inflation and interest rate shocks are beginning to end, seem to be gradually replacing the gloom and doom sentiment with hope. As a result, economic outlook and equity allocation saw some improvement in August from the dire low levels seen in July.

After hitting a record low of -79% in July, a net percent who expect a stronger economy has climbed to – 67% in August. Also, a net 72% of those surveyed expect global profits to decline over the next month, compared to a net 79% in July, which was the highest reading since October 2008. Further, a net 47% of respondents said they are currently taking lower-than-normal risk levels, down from a net 57% in July – a record high in the history of the survey.

Note that inflation in the US fell from a record high in June to 8.5% in July, but continues to be at a multi-year high.

“Despite the good news, there is little to suggest that the Federal Reserve (Fed) will deviate from its hiking path, with comments from several officials following the release reiterating the central bank’s stance that it will continue raising rates to rein in inflation,” Richard Carter, head of fixed interest research, Quilter Cheviot Ltd.

He feels, rather than providing a cause for a pause, the positive (inflation) data has opened up a debate as to whether the Fed will raise by 0.50% at its next policy meeting, as opposed to delivering another 0.75% hike.

Concurring, analysts at Oxford Economics say, with central banks continuing to focus on inflation there is continued uncertainty over the direction of policy. So, they feel, it may be too early to say that peak hawkishness is behind us. “Global central banks will have to remain on guard, with a hawkish bias, even if inflation peaks in Q3 for those where the cycle is most advanced (US, Canada, Norway),” said in a report on 16 August.

In India as well, inflation measured via the consumer price index softened to 6.71% in July from 7.01% in June. However, it is hovering above the Reserve Bank of India’s (RBI) comfort level of 6%. Similarly, inflation measured using the wholesale price index (WPI), slipped to a five-month low of 13.9% in July. “The case for smaller interest rate hikes from the RBI starting in September continues to build, with WPI inflation falling sharply in July,” Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

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