Tariff overhang to delay Fed action; markets await clear catalyst: Santosh Rao

"I am in the camp that believes that two cuts this year is likely. He does not want to get too ahead of the whole inflation scenario. So, he is going to keep it there. Two cuts maybe unless the things get really bad. And that is another argument, if the things get really bad and if he cuts more than two, that means things are really bad and you do not want to give that message. So, two is the right point, later half in the year, that is where we are at this point," says Santosh Rao, Manhattan Venture Partners.

With respect to interest rate environment, especially after US President Donald Trump yesterday again criticized Federal Reserve Chief Jerome Powell, how do you read this development and what does this mean for Fed's next move and back home for India and RBI governor's move as well?
Santosh Rao: President Trump making comments about the Fed chair is not unusual. He does that all the time. He does not worry about that. What is really driving the thinking or the market is thinking that the case for cutting rates is getting stronger and stronger. The job market is weakening. We will get the jobs report this Thursday. It is expected to be about 110,000 which is lower than the prior month. Unemployment rate is going to stick up slightly.

Inflation is coming down at this point. I mean, there was some little bit here and there, but it is generally soft, so the case for cuts. Now, the only issue is, is it going to be immediately or is it going to be in the later half when the tariffs land and we get certainty as to where the tariffs are landing, I think that is the only thing holding the Fed chair back. So, at this point, the market believes that the case is getting stronger and stronger for rate cuts.

I am in the camp that believes that two cuts this year is likely. He does not want to get too ahead of the whole inflation scenario. So, he is going to keep it there. Two cuts maybe unless the things get really bad. And that is another argument, if the things get really bad and if he cuts more than two, that means things are really bad and you do not want to give that message. So, two is the right point, later half in the year, that is where we are at this point.

Now talking about the markets, now S&P 500 and Nasdaq, they are both at record levels at this point. Now going forward as we enter the second half of the year, what is your expectation? Do you think the rally could continue especially given that July 9 tariff deadline looms? And also, I mean, is the rally expected to continue or do you think volatility is expected to be back?
Santosh Rao: Yes, volatility is the name of the game and it is going to stay that way for a while only because there is so many cross currents. At this point, the market is bumping against all-time highs and in fact, it has crossed all-time highs in some indexes. So, at this point and earnings reports coming out next week and on, are going to show that the earnings growth has slowed down, so that is a concern. I do not see any reason for multiple expansions.

So, my bet is that the market is pretty much going to be flat to down going forward. Until much later in the year when the tariff thing is done and then we get a sense of how much tax cuts and what is the new budget and at what shape it takes in the end.

So, at this point, there are more ifs, ands, buts. We do not have any definitive thing, but safe money is betting that it is better to be cautious at this point. Things can get really bad because the economy is slowing down and we need a catalyst to really bump it up and right now I do not see one right there other than lowering interest rates and really spiking up the market in terms of sentiment going forward.

If you can tell us, what is your view on emerging markets including countries like India especially in the backdrop of tariff overhang which could probably play out in the first week of July. How do you view emerging markets especially India?
Santosh Rao: I mean, the way tariff negotiations are going on, I think President Trump is in no rush. Of course, he has these deadlines and they are very loose-loose deadlines. So, he is going to work around and try to get to a reasonable point. At this point, there are some sticky points here and there from last I read. So, it is going to be an ongoing negotiation. It is going to go way past July 9th, that deadline, I think it is pretty much a given that he is not bound to that number.

But overall, the emerging markets should benefit from the falling dollar, that is a big thing. And falling energy prices, that is great. So, those are big pluses for the emerging markets, so is also for US actually.

So, net-net, the tailwind is pretty good for emerging markets. India specifically, they need to sort out the trade deals whatever sticking points there are, but in the end, it will be an amicable settlement because Trump needs to show some development on the tariff side.

He has made so many promises, threatened so many countries. He needs to come up with a good solution. He needs to settle this dispute. If not, he is going to look bad and he has elections coming up next year.

So, he wants to pretty much get some wins in his column at this point and he does not have much other than a framework with UK and China and maybe Canada. But other than that, he has not had any specific ones. So, he needs to show that and India if he can come to a good settlement, that will be a big win for him to show that he is doing well, that he is coming true on his word.