Jerome Powell’s Fed gives the markets what they expected: a 75 basis point hike in fed funds rates, for the second consecutive time, confirming its fight against runaway inflation in the United States. Antonio Cesarano, Chief Global Strategist of Intermonte, gave some brief remarks after yesterday’s Fed. What the manager highlights is that “Powell yesterday appeared somewhat soft underlining two aspects: at some point it will be necessary to slow down the rate hike and that the level reached (2.25 / 2.5%) was defined by Powell of neutrality. Therefore, the rate hikes from now on will bring the rate back above neutral ”. In summary, explains Cesarano, “a softer Powell than in June who also added the reassurance that the normalization of the budget will take 2 / 2.5 years, ie gradually over time (at the rate of 95 billion dollars a month which would be equivalent to to around 2200/2800 billion, ie the return to the budget levels of mid-2020) “.
And the quarterly in the US? On the earning season front, the report reads, “for now the data are results on average above expectations and on average good guidance, although in some cases (see Tesla) they have not been explained in detail, given the climate of uncertainty. In the meantime, from June onwards there was a drastic drop in government rates: 10y bunds from 1.65% to 0.90%, 10y Treasuries from 3.5% to 2.70% ”.
At a second “what if” test
Il first what if happened in 2020, that is what happened to the stock markets in conditions of closed but liquidity flooded economy. The result, we read in the report, “US stock exchanges at an all-time high, evidence of the decisive role of liquidity and on the side of the level of interest rates. In other words, we can think about the choice of wine but only if we are sure that there is plenty of water, which alas, is no longer so obvious “.
Il according to what if we are experiencing now in 2022, i.e. what would happen to rates if QE (Quantitative easing) ceases? Result (partial for now): according to Cesarano, “rates are starting to decline since June, that is, since QE on a global scale (apart from the BoJ) is no longer there and indeed, in several cases, the QT (Quantitative tightening) and above all we are in a context of inflation around 9%. If the downward trend in rates lasts until the end of the year with rates personally expected around 0 / 0.50% on the bund and 2 / 2.50% on the 10y T-note, it will be yet another evidence that QE amplifies but does not determine the trend. The causes are to be found in the aging trend combined with growing inequalities “.
What scenario to expect on the macro front?
On the macro front, the report reads, “one is likely recession in Europe towards the end of the yearcaused mainly by high inflation to which the Russian gas bottleneck is being added, which is holding back Germany and, consequently, other countries linked to Germany as well ”.
In the US, however, Cesarano points out, “the recession is likely in the course of 2023, as anticipated by the interest rate curve, which reversed at the beginning of April and then again and more markedly in July (2/10 years). The closest recession time will likely be signaled by the 3 month / 10 year reversal. The 2/10 years see well from a distance, the 3 months / 10 years see well up close “. According to the manager, it will be “a real recession that involves a manual fall in income and employment, phenomena that we should see more realistically in 2023”. A different phenomenon compared to the US technical recession in 2022 (today’s GDP figure for the second quarter down by 0.9% decreed the beginning of the technical recession) which “could instead be only a symbolic recession, ie slowdown in growth but the job market is still strong “.
The arrival of the aforementioned recessions, explains Cesarano, “little by little will soften central banks to the point of a monetary policy reversal and therefore the sun could return to shine between the end of the year and more realistically in a 2023 perspective, thanks to the return of a regime of low rates and potentially the stop of the QT ”.
How to position yourself on the markets?
For the current quarter, Cesarano expects “on average, falling rates and commodities”. For scholarships it is necessary to have “a lot of attention to the liquidity trend given that we are in a QT regime and in this case I keep a close eye on the dynamics of US banks’ deposits with the regional Fed, data available on a weekly basis ”(see graph below).
Furthermore, the report reads, “the most delicate moment for earnings could be September, when we will start to think more in view of 2023”. For the summer, the Intermonte manager recommends “overweight the growth component in all its meanings, from digital, to the cloud, to chips, etc., as this is the component most sensitive to the recovery of the downward trend in rates “.
In summary, Cesarano indicates that “increase exposure on govies and in the credit field, prefer the euro ones “. On the stock market, “prefer growth with an eye on China which is gradually giving signs of interest in growth”. Finally, eyes on forex: according to Cesarano, “the tensions regarding the supply of Russian gas keep the EurUSd exchange rate close to par. With a view to the end of the year, the emergence of a more pronounced US slowdown with the consequent end of the Fed rate hike, could little by little revive the depreciation of the dollar”.