If everything goes as expected, the US could see two rate cuts in second half: Santosh Rao

Santosh Rao, Head of Research/Partner, Manhattan Venture Partners, says the risk-reward appears to be in favour of the Trump agenda, which could bring positive news for the market. Overall, it looks good for the next two to three quarters. There's often a honeymoon phase when a new president takes office, especially after a strong election win, and historically, the market tends to rise during this time. This trend should continue for about a year. Rao hopes Trump approaches his policies thoughtfully and carefully, rather than aggressively. If everything goes as expected, the US could see two interest rate cuts in the latter half of the year.

What is your take on the Gaza ceasefire that has been announced. A 15-month war is coming to an end. What will be its importance within the global setup because the markets were quite jittery with concerns that we are in for a long drawnout war?
Santosh Rao: Yes, needless to say, that is an understatement. It is great news. This sends a positive signal ahead of Trump coming in. We can argue that it was because he is coming in, this happened sooner than when it would have happened. So, his threat may be carrying some weight. But whatever it is, the net, I am very happy for the hostage families, for everyone and we are very sad about the loss.

Net-net, overall we still have the Ukraine war going on. We need to hope for a settlement there soon. But this sends a positive signal. We want to get back to normal state of affairs, though it is asking for too much in the Middle East. But whatever it is, as long as things are okay there, it has a positive impact everywhere.

So, what does it really spell for equity markets given that there was a bit of a knee-jerk reaction or at least a sentimental fillip from global markets this morning. How sustainable is it?
Santosh Rao: So, we have had a perfect confluence of positivity, like across the board. We have got great bank earnings. We got good jobs data last week and the CPI today was good, not great, good. It was softer than expected, which is always good. But we are still far away from the 2% inflation that he wants to get to. So, the last mile is proving increasingly difficult.

At this point, I would not jump the gun. We have to wait and see. There’s still a long way to go. Let us see the earnings reports and what they are forecasting and what they are seeing on the ground but the sentiment is definitely positive. I read some surveys, and small businesses are very excited. They are looking forward to tax cuts. They are looking for some protection in terms of tariffs and things like that. So, there are some effects and then on the other side, there is the inflationary effect of all this.

So, let us see who wins out. But at this point, the risk-reward seems to be balanced in favour of the Trump agenda taking hold and bringing some good news to the market. It is net-net positive, at least for the next two-three quarters. There is always a honeymoon period. When a new president comes in, especially on a red wave, the market is always up historically. So, that will definitely hold for one year but till then, I hope Trump is really careful, methodical, and institutes his policies very carefully and not very brazenly.

You are talking about how the small businesses in the US are excited about Trump taking over, but what do you think could be the implication of the CPI data, as well as Trump coming back, on the Fed trajectory? Earlier, there were expectations that there is going to be no rate action in 2025. But now people are pencilling in a rate cut in June or September. Your take?
Santosh Rao: I would say it is still early. The Fed chair is always looking at the labour market. He is looking at the CPI. The whole narrative, the consensus, had pushed the cuts to the second half. Two cuts in the second half is the base case.

Now, the whole issue is, is he going to stick with that or not? At this point, if the data continues, if it comes in light softer and softer in terms of CPI and the labour market gets rid of the distortions in terms of the fact that there is seasonality regarding most jobs. Let us see if there is adjustment in the next report. But overall, if things stay the course, I am in the camp that we will have two cuts in the second half of the year.