2023-04-30 08:31:52
The Fed forecast
It’s a virtual certainty: the US Monetary Policy Committee (FOMC) will raise interest rates by 0.25% the week of May 1, 2023, bringing them to 5.00-5.25%. If we analyze the futures contracts, 93% of investors expect this result. It would be a natural continuation of Fed policy since February. However, what follows is more uncertain. From March to December 2022, the Fed raised rates at an unprecedented pace. The central bank then decided to slow down the tightening process, initially because inflation was showing signs of slowing but more recently because of banking stress.
The reasons for the end of the monetary tightening cycle
We also believe that the US central bank will continue its quantitative tightening policy at its current pace. We also do not believe that an amendment to the agreement on the reverse repurchase facility is planned. This agreement ensures the necessary liquidity on the financial markets.
For most analysts, the monetary tightening cycle will soon be coming to an end. Four reasons for this:
– The peak of inflation is undeniably behind us
– The labor market seems to be less tight
– The Fed probably does not want to tighten monetary policy at a time when banking stress remains a major issue for regional banks
– The Fed will have to lower its rates before the end of the year given the arrival of a probable recession
iBanFirst forecasts
Futures traders are anticipating a first rate cut at the November 1 FOMC meeting. This can of course change depending on the evolution of the economy. At Ibanfirst, we plan:
– The arrival of a moderate recession in the second half of the year in the United States
– A first rate cut just following an initial economic downturn and a slowdown in the job market
Conclusions
From a market perspective, even a mild recession will make for a difficult time for risky assets – typically stocks. We are not convinced that FAANG earnings are acyclical, for example. A recession will cause investors to favor safe-haven investments and the market reaction will likely be positive for the US Dollar once the recession is confirmed.
That said, we also recognize that the rules of the game have fundamentally changed, the traditional analysis in terms of cycles no longer works. Most developed economies face significant headwinds. Also, market prices seem disconnected, which is more the case between stocks/bonds than in the forex market nonetheless.
We are seeing just one typical “pre-recession” element right now: risk appetite is greater in the financial markets (with equities booming and a weak dollar). Often risk appetite increases when a Fed pause is contemplated. But appetite will surely turn to aversion when the US employment rate begins to decline.
Sometimes risk appetite increases following the first rate cut (the argument being: the Fed will save us all!). Then comes the time for reflexivity. Significant job losses will lead to macroeconomic reflexivity and the question is whether the Fed’s rate cuts will be enough to break this momentum. But it will be a while before that happens. Probably at the end of the year or the beginning of 2024.
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