Watch out for the ‘bazooka’ expected by experts

By Laura Sanchez – Red dominates European markets this Thursday, with the Ibex 35, CAC 40 and DAX following the same tone of yesterday’s negative close for Wall Street’s S&P 500, NASDAQ, Dow Jones, and the falls in Asia early this morning, after Jerome Powell’s speech yesterday following the U.S. Federal Reserve’s rate decision.

In the post-Fed hangover, analysts provide their views and outlook on what to expect now.

Market behavior “clearly went from more to less, with the FOMC statement and the subsequent press conference of its chairman, Jerome Powell, as the turning point of the day,” explains Link Securities in its daily market commentary.

The key to everything, the ‘slam dunk’ for the market was, according to Bankinter’s daily report, that “Powell said that to start lowering rates they will have to be sure that inflation is heading towards the 2% target and there is still a long way to go”.

BBVA Research said the Fed was unmistakably hawkish with the phrase, “we have more work to do.”

The unmistakable hawkish message

As Link Securities points out, after the Fed raised rates by 50 basis points, as the market expected, the surprises began:

The Fed made it clear that it will continue to raise its interest rates to fight high inflation and that it will do so to levels above what it expected in September (5.1% vs. 4.6% in September) and above what the market had been discounting (4.86%). The Fed also ruled out that it intends to start cutting rates in 2023, something that will not happen until 2024, when inflation shows clear signs of heading toward the 2% target. The Fed revised down its economic growth expectations for 2023 and 2024. The Fed revised upward its inflation expectations, a variable that will not be close to 2% until 2025 (it expects 2.5% in 2024).

What next?

Charles Diebel, Head of Fixed Income at Mediolanum International Funds Limited (MIFL), notes that “the Fed’s determination to raise rates to address inflationary risks could be interpreted as a tilt in favor of monetary policy, but is likely to reflect the recent easing of financial conditions and thus demonstrate its determination to control inflation in due course. The key variable from here will be how growth holds up in the face of further tightening.”

“While this scenario of higher rates, lower growth and more persistent elevated inflation is the one that seems most feasible to us, more so after listening to Powell and analyzing the new macroeconomic picture presented by the Fed, the ‘moderate’ downward reaction of equity markets yesterday leads us to believe that many investors “don’t believe the Fed” and seem willing to fight it, which historically has always been a serious mistake. What’s more, futures continue to anticipate official rate cuts in the second half of 2023, something that seems to us, as of today, highly unlikely,” notes Link Securities.

“The fact that the Fed did not abandon the ‘continued increases’ language in its statement suggests that it is planning to raise rates several times (at least twice) next year,” notes BBVA Research.

“The median projection for the federal funds rate by the end of 2023 was revised to 5.1%. This suggests an aggressive outlook with an additional 75 bp in total tightening to come,” the analysts add.

While stocks fall, “bonds and the dollar barely move despite the recent good performance of bonds (T-bond IRR -75 bps to 3.5%) and negative dollar (depreciation since end-September of 11%), which seems to suggest investors are skeptical about maintaining high rates in the face of a larger-than-expected impact on the cycle,” concludes Renta 4.

(Translated from Spanish)

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