Understanding Interest Rates Impact

Today marks a decisive turning point for India’s macro-economic direction! The RBI’s Monetary Policy Committee has cut the repo rate by 25 bps to 5.25%, upgraded FY26 growth to 7.3%, and brought inflation guidance down to 2%. What this means and why the shift matters: 1. Relief for borrowers & businesses A lower repo rate typically eases borrowing costs. Expect improved affordability for consumers and enterprises, which can lift consumption and support capex cycles. 2. A rare “Goldilocks moment” With inflation contained and growth estimates rising, we’re seeing a compelling intersection of price stability and demand-side stimulus — a combination that markets don’t get often. 3. Sectoral tailwinds Real estate, infrastructure and discretionary categories often feel the weight of high interest rates. With easier financing conditions, these sectors may see revived investments, improved hiring, and stronger demand. 4. A disciplined policy stance Despite the cut, RBI’s tone remains measured. The stance is neutral, inflation is modest, and the central bank retains room for future data-driven adjustments. From a macro lens, this isn’t merely a rate cut it’s a signal that India is entering a phase where stability and sustained growth can coexist without inflationary overshoot. What I’m tracking next: Transmission of rate cuts to retail lending, movement in fixed capital formation in Q3, consumption patterns in urban + semi-urban pockets, and MSME credit flow. Is this the start of a new growth cycle? I’m inclined to think yes but the next two quarters will tell us more.

Use this simple approach to master the Bond Market. Nominal bond yields can be thought of as the interaction between: 1️⃣ Growth expectations 2️⃣ Inflation expectations 3️⃣ Term premium 1. Growth expectations When it comes to economic growth we must consider two angles: structural and cyclical growth. Structural economic growth can be generated through more people joining the labor force (good demographics) and/or through a more productive use of labor and capital (strong productivity trends). The ability of an economy to generate structural growth is an important driver behind long-dated bond yields (strong structural growth = structurally higher long-dated yields and vice versa). Short-term economic cycles also matter for bond yields and particularly at the short-end. Cyclical growth trends are driven by the credit cycle, the fiscal stance, earnings growth, labor market trends and more - the healthier they are, the higher short-end bond yields can be pushed also as a result of a likely tightening from Central Banks that might grow worried about economic over-heating and inflationary pressures in such an environment. 2. Inflation expectations The second component driving nominal bond yields is inflation: but NOT TODAY'S inflation - instead we are referring to long-term inflation expectations. Central Banks might temporarily react to concentrated bursts of inflationary pressures by raising short-term interest rates but when it comes to long-dated bond yields investors will always pay close attention to inflation expectations. That's because consumers and borrowers will tend to make important decisions based on these rather than on volatile short-term trends in inflation. 3. Term premium An investor looking to get fixed income exposure can do that via buying 3-month T-Bills and rolling them each time they mature for the next 10 years. Alternatively, it can decide to purchase 10-year Treasuries today. What's the difference? Interest rate risk! Buying a 10-year bond today rather than rolling T-Bills for the next 10 years exposes investors to risks – term premium compensates for this risk. The lower the uncertainty about growth and inflation down the road, the lower the term premium and vice versa. 💡 The Main Takeaway 💡 If you want to make sense of bond yields, a useful approach to use is to think of them as the result of growth expectations, inflation expectations and term premium. P.S. If you liked this post you'll love my macro research. I share my macro analysis every day with the biggest institutional investors and hedge funds in the world. Get your FREE trial here👇🏼 https://lnkd.in/dyFFJp-z

Third time is a charm I have been asked why the Fed shouldn’t cut rates to help low income households three times this week. The reasoning is that the labor market is weakening, which is a problem, especially for those who live paycheck to paycheck. There is also an assumption implicit in the question that marginal cuts in short-term rates will actually help those most in need. We are seeing the worst surge in many subprime loans since the aftermath of the Great Recession. I have a lot of empathy for the desire to shore up the labor market, especially on the heels of the government shutdown and the spillover effects it is having on contractors and the ecosystems that federal workers reside in. Threats by the administration to make layoffs and funding freezes to some states permanent in the high stakes’ showdown are even more worrisome, as it raises the risk that we may not recoup as much as usual when the federal government reopens. That does not mean rate cuts will help by much, given the inflation we are also enduring. There are three reasons for my reticence on rate cuts: 1. Subprime interest rates are much higher than those for higher credit score borrowers; any cut in rates represent little more than a drop in the bucket to lift the economic fortunes of those debtors. 2. Lower short-term interest rates tend to boost asset prices, which are already looking frothy. Those gains accrue more to affluent than low-income households, which worsens inequality and leaves more of the economy concentrated in the hands of a few households. The top 3.3% are doing particularly well already; the rest, not so much. 3. The inflation due to tariffs tends to hit low- and middle-income households harder than affluent households. Low- and middle-income households tend to rely more on imports, which means they are bearing more of the burden of tariffs, which are a regressive tax. The result is a cognitive dissonance on how to restore economic opportunities for low- and middle-income households. Indeed, there is a strong argument that the ultralow rate environment following the Great Recession fueled financial market gains and worsened instead of improved inequality. The moral of the story is that monetary policy is a blunt tool, especially when dealing with inequality. It can help spur growth but not evenly. It could even stoke an asset bubble, which could burst and deal another disproortionate blow to low-income households. Fiscal policy is better at addressing those issues. If a cut in rates goes too far and stokes a more persistent bout of inflation, then low-income households will suffer more, not less. Food for thought in a world where inflation and inflation expectations are both rising as the labor market weakens. Hence, Fed Chairman Powell’s fear that there is no “risk-free” policy choice at the moment. The Fed will cut next week but do so knowing that policy is still restrictive. Walking a tightrope.

How does the Fed Rate Cut impact the global economy? Tomorrow, the Federal Reserve is anticipated to announce a rate cut of 25-50 basis points, and while it may sound like a minor shift, the ripple effects of such a decision will be felt across the economy. A Fed rate cut typically leads to lower borrowing costs, which can have far-reaching impacts on both individuals and businesses: 1. Lower Borrowing Costs 🏦 Lower monthly debt payments and more disposable income will enhance the customers' purchasing power. 2. Stock market to go green 📈 When borrowing becomes cheaper, businesses are more likely to invest in expansion, hiring, and innovation increasing share prices as investors foresee costs going down. 3. Gold Prices 🌟 The 24k gold prices in the UAE surged from Dhs 302.5/g to a high of Dhs 313.5, marking an increase of 3.64% within 10 days in anticipation of the rate cut. Gold prices and the Fed rates have an inverse relationship. 4. Reduced FD and Savings rate 💰 Lower interest rates for savings accounts will make it harder for savers to earn a return on their deposits. This disproportionately affects retirees and those relying on fixed income from savings. 5. Housing Market Boost 🏡 With lower mortgage rates, the housing market may see a surge in demand. Homebuyers will find it easier to secure loans, making property ownership more accessible, though this could also push housing prices higher in the long run increasing the rentals. 6. Long-Term Debt and Inflation 📉 While a rate cut might provide short-term economic relief, there’s a concern about increased borrowing and rising inflation. It’s a delicate balance, and we’ll have to monitor how this move impacts inflation over time. A 25-50 basis point cut might seem modest, but its effects will reverberate throughout society. For some, it will mean relief, while for others, it may introduce new challenges. Either way, this decision will influence the economic landscape for months to come, especially as we continue navigating uncertain financial times. Stay tuned for tomorrow’s announcement—how do you think this rate cut will affect you? 🤔 Follow CA Kathit Parikh for more such insights LinkedIn | LinkedIn News #FedRateCut #Economy #FinancialMarkets #InterestRates #EconomicImpact #Finance #Investing

Where do you think interest rates are going to go? Jamie Dimon has an idea. In his annual letter to JPMC shareholders, he indicates inflation is here to stay a while, and therefore, rates could go as high as 8% in the medium term. He said: "It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus. There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure and battling rising healthcare costs. This may lead to stickier inflation and higher rates than markets expect." I can't argue with that. He has a point. Now, if you have to combat inflation, you need to raise interest rates. That isn't a risk-free move, as people in the CRE game know. Now what do you think happens if interest rates stay higher for longer? "A scenario where the federal funds rate hits more than 6% would likely entail more stress for the banking system and for highly leveraged companies... Rates have been extremely low for a long time, and it's hard to know how many investors and companies are truly prepared for a higher rate environment." This is a fantastic summary of our current moment. There is a lot of wishful thinking that interest rates will go back to the 2010-2022 period of QE and low rates. Many of the people trading actively in markets are under 37 and thus have no living memory of working on Wall Street when interest rates were not pressed down along the entire curve by aggressive Fed policy. For banks, for hospitals, for businesses - you need to incorporate scenario analysis into your annual financial plan. What if Fed Funds went to 6% and the 10y UST went to 8%? Would that break anything? Would you be prepared with a flexible balance sheet to absorb these rate changes and still operate normally? Considering this kind of extreme scenario in a relatively calm moment is a helpful exercise to allow organizations to position balance sheets for resilience and prepare necessary actions to take just in case. As financial planning gets underway at institutions this year, I think it's a very good idea to conduct scenario analysis to ensure you are protected. It's all about good risk management. Mr. Dimon claims JPMC is ready to thrive in any economic conditions: "While all companies essentially budget on a base case forecast, we are very careful not to run our business that way. Instead, we look at a range of potential outcomes for which we need to be prepared." Good advice. #fedpolicy #riskmanagement #interestrates

Fed Rate Cut Impact When the Federal Reserve (Fed) cuts interest rates, the stock market typically experiences several notable effects. While the specific outcomes can vary based on the broader economic context and market conditions, the general trends are often observed as follows: Immediate Market Reactions 1. Positive Sentiment: A rate cut usually signals the Fed's intention to stimulate economic activity, which can boost investor confidence. 2. Increased Valuations: Lower interest rates mean that the present value of future earnings increases, as the discount rate applied in valuation models decreases. 3. Sectoral Impact: Financials: Banks and other financial institutions may face pressure on their profit margins. Real Estate: Lower rates can boost the real estate sector by making mortgages cheaper, thereby increasing housing demand and benefiting related stocks. Technology: Tech companies, often characterised by high growth potential and significant future earnings, tend to benefit. Medium to Long-Term Effects 1. Economic Growth: Sustained rate cuts aim to spur economic growth by making borrowing cheaper for consumers and businesses. 2. Inflation Expectations: If rate cuts succeed in boosting demand, inflation may rise. 3. Corporate Debt: Lower interest rates make it cheaper for companies to refinance existing debt and issue new debt. Historical Context and Examples 1. 2008 Financial Crisis: During the financial crisis, the Fed cut rates aggressively to near-zero levels. Initially, the stock market continued to decline due to severe economic uncertainty. However, as the economy began to stabilise, lower rates supported a significant recovery in stock prices, culminating in a prolonged bull market. 2. COVID-19 Pandemic: In early 2020, the Fed cut rates to near-zero in response to the economic impact of the COVID-19 pandemic. This action, combined with other stimulus measures, helped to stabilise the stock market after an initial sharp decline, leading to a robust recovery and new market highs later in the year. Caveats and Considerations 1. Market Expectations: The impact of a rate cut can be muted if it is already widely anticipated by the market. 2. Economic Context: If a rate cut is perceived as a response to deteriorating economic conditions, the positive impact on stocks might be limited. 3. Long-Term Rates: While the Fed controls short-term interest rates, long-term rates are influenced by market forces. In conclusion, while Fed rate cuts generally have a favourable impact on the stock market, the extent and duration of this impact depend on various factors, including investor sentiment, economic conditions, and the broader monetary policy environment. Investors should consider these dynamics and remain vigilant to the broader economic signals accompanying rate cuts. References Federal Reserve Historical Interest Rates Impact of Federal Reserve Rate Changes on Stock Market Economic Insights from Fed Actions

The calm before the storm for US Treasuries? 🌊 +++Option traders bet on deep Treasury-market sell-off within weeks — JP Morgan client short positions rise to most in a month+++ "A bearish 🐻 tone is taking hold in the market for interest-rate options, suggesting that bond traders are bracing for Treasury yields to surge anew in the coming weeks. There has been steady demand for bearish hedges using Treasury-option put structures in January contracts on 10-year notes, which expire Dec. 27. Positioning has also been building over the past couple of days in the February options, which expire Jan. 24, the week of President-elect Donald Trump’s inauguration. Open interest, or the amount of outstanding positions held by traders, has been building specifically between the 107.50 and 109.50 put strikes in the January and February options. Those levels target a 10-year yield range of approximately 4.45% to 4.75%, relative to roughly 4.3% now. The upper bound of that span would push the yield above its 2024 high of about 4.74%, touched in April. On Tuesday, an even more bearish position traded, targeting a yield as high as 4.9%, for a premium of $2.5 million. The benchmark yield hasn’t been that high in more than a year. ⚠️ The wagers are a reminder that even though yields have surrendered the brunt of their post-election advance, investors are well aware of the potential for the so-called Trump trade to gain traction again. The premise of that trade for months has been that his policies including steeper tariffs would quicken inflation and push yields higher. Treasuries fell modestly on Tuesday, bumping up 10-year yields slightly, after Trump threatened to place additional tariffs on US trade partners. 💡Along with Trump’s first few day’s in office next month, a couple of other events ahead will be key for these options bets. First off, next week’s report on November job figures is projected to show a big jump in employment from the prior month. 💡Then there’s the Dec. 18 Federal Reserve policy announcement. Traders see it as a coin toss as far as whether officials will cut interest rates by another quarter-point or stand pat amid signs of economic resilience." (Bloomberg, 26 November 2024) (+++Opinions are my own. Not investment advice. Do your own research.+++) #markets #investing #money #wealthmanagement Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

All eyes are on the Fed’s anticipated rate cut this month, the most significant event shaping market sentiment. We’ve been hearing a lot of concerns that rate cuts signal an economic slowdown and could turn into a negative event for the markets. But is that really the case? In fact, the impact of rate cuts is highly contextual. According to a recent report by the Franklin Templeton Institute, history shows that the effect of rate cuts varies greatly depending on the economic conditions at the time. 📉 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬 𝐢𝐧 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐬 𝐯𝐬. 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐬: • 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: During recessions, rate cuts can initially cause a dip in equity markets. In these periods, equities have historically seen short-term declines, with Treasuries often outperforming as a safe haven. It’s a defensive play, indicating the markets brace for further economic deterioration. • 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: However, when rate cuts occur during economic expansions, the story is entirely different. The report shows that equities tend to rally significantly after rate cuts in expansions, with growth and small-cap stocks leading the way. Historically, the S&P 500, Nasdaq, and Russell indices have all performed exceptionally well following expansionary cuts, with minimal drawdowns. 📊 𝐊𝐞𝐲 𝐒𝐭𝐚𝐭𝐬: • During recessions, equities declined by an average of 4.96% in the first three months post-rate cut, but then rebounded over the next 6-12 months. • During expansions, equities often surged, with the Nasdaq gaining 25.33% over the year following the first rate cut, while the S&P 500 rose 16.66%. So the big question becomes: Has the recent rate hike cycle slowed growth enough to push us toward a recession, or do we still have room for economic expansion? This is the critical factor that will determine whether the upcoming rate cut will spark a bull run or trigger a market pullback. 📈 𝐖𝐡𝐚𝐭 𝐇𝐚𝐩𝐩𝐞𝐧𝐬 𝐍𝐞𝐱𝐭? Historically, during rate-cutting cycles, value stocks perform well initially, but growth stocks take over as the market gains momentum. That’s exactly what we’re seeing right now—growth stocks have been outperforming, a positive sign that the economy could still have room to grow. More than anything, what will truly define the trajectory of the markets is how well the Fed manages to navigate the “soft landing”—balancing the slowing inflation without stalling economic growth. This delicate balance will be crucial in determining whether the upcoming rate cut sparks growth or reinforces recession fears. #MarketInsights #RateCuts #Investing #FedPolicy #GrowthStocks #EconomicExpansion #StockMarket #Treasuries

The Federal Reserve Board held #interestrates steady yesterday, as expected, while also signaling that rates will likely "stay higher for longer". The board also issued a new dot plot (see image below, courtesy of Yahoo Finance) that shows their adjusted expectations for the future rate environment, including a first look at 2026. The short summary of the dot plot's movement is that the FED now expects the Federal Funds Rate, which influences borrowing costs for consumers and businesses, including the rates for mortgages, autos, student loans, and all other variable rate #loans, to be about 0.5% higher in both 2024 and 2025. With #inflation remaining persistently above the FED's 2% target, none of this should come as a surprise. My view has long been that we've entered a new inflation paradigm, and we're unlikely to see cost pressures retreat to the FED's target range anytime soon, barring a substantially worse #recession than the one likely on the horizon. Alex's Analysis: What does this mean to business leaders? Simply put, you have to consider the numerous ways that the interest rate environment affects your day-to-day operations and longer-term #strategy. Here are some examples of how high interest rates affect your business: 1️⃣ High rates limit your cash flow. More expensive debt means using more of your cash to cover interest costs. It also limits your ability to invest in long-term growth and causes less day-to-day cash flow stability. 2️⃣ High rates prevent you from getting short-term credit. Qualifying for new loans will require higher credit standing or scores, while repayment challenges will constrain your ability to borrow more money. 3️⃣ High rates lead to lower demand for your products and services. As clients become more cost-sensitive and gravitate towards the "must haves", your customer retention or acquisition rates will likely drop, undermining sales. 4️⃣ High rates make it more difficult to plan for the future. It will be harder to update your financial plan and prepare for future growth, especially if you have variable-rate loans. This will affect decisions about R&D spending, hiring plans, inventory management, and many other things. One concrete piece of advice I can offer is that you should assume no attractive financing will be available for the next 12-24 months, so optimizing cash flow to fund current operations and future investment must be a priority as you plan for 2024. Hope that helps and happy planning!

The Fed Acts, the Market Reacts: The Fed lowered rates last month by 50bps & the 10-year UST rose by 50bps. SOFR was 5.35% the day the Fed lowered rates on September 18 vs. today’s SOFR rate of 4.85%. 10yr UST was 3.70% on September 18, today it is 4.20% SOFR/10-yr UST is exactly 100 bps steeper since the Fed lowered rates by 50. 8 quick take-aways: 1. Bigger NIM = Bigger bank earnings 2. Leveraged unhedged investors who benefit from steeper yield curve benefit 3. Long duration takes a hit 4. Floating rate asset continue to perform well as credit metrics improve 5. Credit spreads not impacted, as earnings/economy remains robust 6. Government funding costs higher since Fed lowered rates (net increase in issuance + higher treasury rates) 7. Home sales/refinancing slows as mortgages are predominately a long-term fixed-rate market 8. The Fed controls Fed Funds, The Market controls longer term rates (unless the Fed manipulates through QE) which they are unlikely to do at this juncture