The major equity markets are unable to recover from the violent sell-off that characterized last Friday’s session and which was triggered by the statements of Fed chairman Jerome Powell. At the Jackson Hole summit, the number one of the US central bank confirmed his willingness to keep the bar straight to contain inflation (and bring it back to the 2% target) and set the stage for a 75-point rate hike. based on the next meeting on 21 September (although the decision will depend on the totality of economic data). This is what we read in an edited report Luigi de Bellis, co-head of the Equita Research Department.
The 5 crucial points of Powell’s speech
Five important considerations emerged from Powell’s words, according to Equita:
- Strong commitment a restore price stability for which the Fed has responsibility.
- Bringing back price stability requires a restrictive policy over a period of time, too at risk of a slowdown in growth.
- The restoration of price stability will most likely involve a certain softening of the conditions of the labor market and “a little pain for households and businesses,” but the benefit will be low and stable inflation and better long-term outcomes for the economy.
- Historical experience warns against premature loosening; central banks can and should assume the responsibility for ensuring low and stable inflation and the employment costs of reducing inflation are likely to increase with the delay.
- At some point, without specifying when, it will be appropriate to slow down the pace of the straits.
How much will the Fed and ECB rate hike be by the end of the year
The market is discounting now fed funds at the end of 2022 around 3.8% (from 3.3% at the beginning of August and 3.7% last week) from the current 2.25-2.5%, therefore around 125 basis points for rate increases between now and the end of the year.
Also Isabel Schnabel, a member of the executive committee of the ECB, has openly sided in favor of strong interventions, and therefore rate hikes without “caution”, making a 50 basis point hike likely at the next meeting on 8 September. In a scenario that promises to be volatile due to the geopolitical context, Equita specifies that the market discounts between 125-150 basis points of rate increases in Europe between now and the end of 2022 (therefore the deposit rate at 1.25-1.5% at the end of the year).
Equita prefers quality securities
The increase in expectations of restrictive monetary policies has recently penalized quality / growth stocks (more exposed to derating risk in a scenario of rising rates) compared to values. However, according to Equita, recent developments in Europe, mainly due to rising energy costs, point to a risk of a deeper-than-expected economic slowdown. The investment bank believes that, in this scenario, i quality securities with greater international diversification, solid financial structure and inflation protection.