Fed and rates: Intermonte presents the magic number

Inflation, rates and the Fed: Antonio Cesarano, Chief Global Strategist of Intermonte, comments on the words that the president of the American central bank, Jerome Powell, uttered yesterday at the Brookings Institution.

Words that immediately triggered the market rally, given that Powell opened up the possibility of raising rates in a less aggressive way, after the four consecutive maxi tightenings of 75 basis points, which brought the cost of money in the States to a record since 2008 , i.e. to the inclusive range between 3.75% and 4%.

“It makes sense to moderate the pace of interest rate hikes”said Powell, uttering the magical phrase that markets around the world have been waiting to hear:

the intensity of the Federal Reserve’s monetary tightening, admitted the helmsman of the US central bank, “could be moderated as early as the next meeting of the FOMC (the monetary policy arm of the Federal Reserve)”, on the calendar the next 13 and 14 December.

Powell thus endorsed market speculation, who bet and are now betting with more conviction on a lower monetary tightening, in December, equal to 50 basis points. However, not everyone noticed Jerome Powell’s more dovish nature.

Indeed, someone pointed out that the Fed’s approach it is meant to remain aggressive.

We come to the comment of Anthony Cesarano:

“As an old advertisement proclaimed, Powell’s speech ultimately turned out to be ’10 floors of softness’, partially belying the more aggressive statements of three authoritative Fed members of the caliber of Bullard, Williams and Mester, who especially emphasized the fact that markets must not undervalue the aggressive intentions of the Fed in order to quell inflation”.

Powell, he explained the chief global strategist of Intermonte, in fact, it confirmed the three already well-known points, namely:

• we will slow down the pace in December.
• The peak will be higher than that reported in December
• after the peak, we will hold rates steady for a while

But the markets were above all surprised the additional words which I try to list literally:

• “We don’t want to do huge damage to the economy by raising rates.”
• “We do not want to exaggerate and for this reason we are slowing down the pace of rate hikes”

“In other words, a tenor of the speech that reassured the markets of non-warlike intentions of the Fed starting the landing towards final landfall around 5% on February 1st (the first Fed meeting of 2023) before holding rates for a while. Powell himself recalled the ‘magic number of 5%’, announcing that the inflation figure monitored by the Fed (the core PCE) for October (published today) is expected at 5%”.

This datum, the parameter preferred by the Fed to guide its monetary policy decisions and therefore on rates, has been published, and has further revived hopes of an inflation which, in the USA, has reached its peak.

Fed rates: the magic number

Cesarano in this regard, waiting for the US employment report which will be published today at 14.30 Italian timeanticipated that:

• Probably also the wage dynamics (to be published on Friday, today) will settle at around 5%.
• So many clues that actually make more and more certain proof that the Fed will stop at 5% in the process of raising rates.

“Irony of fate, 5% is a number that rang out yesterday also in the preliminary Euro inflation data: the general figure dropped from 10.6% to 10% while the core figure (net of energy and food) remained nailed to just 5%. In essence, even for the ECB there is the possibility of slowing down the rate of increases in December (based on the slowdown in inflation) in the face of the discussion on the start of quantitative tightening (i.e. allowing a part of the securities in the portfolio to lapse without reinvesting) due to the need to curb the core part of inflation, which still shows no signs of bowing its head”.

“The context of greater softness has also found the Chinese side today, with the announcement of measures that at least make the Covid containment measures more bearable: shorter quarantines and above all in one’s own homes and no longer in the narrow places decided by the government” .

• A way to try to contain the winter contagion, placating the excesses of bad mood that emerged with the street protests, waiting to be able to reopen more widely with the lunar new year from February (the year of the rabbit for those who love the Chinese horoscope) .
• In this phase, the yuan represents the most reliable and fastest thermometer of the expectation of reopening with the new winter year, with a marked appreciation against the dollar in recent days.

Intermonte: Powell opens in December favorable for stocks and bonds

In summary, the chief global strategist of Intermonte Antonio Cesarano listed the news that emerged from the speech of the Fed’s number one, also illustrating the conditions in which the markets find themselves:

• Powell opened a potentially favorable December altogether for stock lists and also for bonds.
• In terms of S&P500on a monthly basis October closed with +8%, November +5%
• December could at least partially emulate November.
• There may be some curve, it will not be all rosy, especially if some macro data/event does not live up to the most optimistic expectations, also considering that we are at very low levels of volatility (area 20 del VIX).
• Overall December should give away a positive ending on a monthly basis.
• On the interest rate front, the favorable phase could continue for both government and corporate maturities within 5 years, which they could offer a fair risk/reward ratio and make it possible to ride very flat and, in some cases, inverted interest rate curves, as in Germany.
• In the first months of next year the possible Chinese reopenings ed the return of Europe to the gas market to start restocking inventories could lead to an increase in the commodity sector (oil, copper and iron ore in the lead) with an increase in fears that central banks could become less soft, which could only temporarily interrupt this scenario.
• These stages altogether could reveal themselves entry opportunity in view of the first semester.
• Likely the central banks could effectively accept a compromise with reference rates well below inflation, to try to balance the difficult equation that should lead to a slowdown in the economy that is yes but not disastrous, together with that of trying to stem in the shortest possible time time hyperinflation is possible”.