The lift-off in rates continues
Source: Bloomberg. Federal Funds Target Rate – Upper Bound (FDTR Index)
Last week the Fed raised rates by a 4th consecutive 75 bps rate, something widely expected by investors given that inflation is running at multi-decade highs. Markets were not surprised and Fed Chair Jerome Powell said “It is very premature, in my view, to think about or be talking about pausing our rate hikes” adding that he did not believe the Fed had yet “overtightened,” leaving the door wide open for the pace of rate hikes to remain aggressive.Worried Investors
Despite the cautionary tone by Powell, investors remain anxious as the Fed tends to lift rates until something in the markets goes awry. During the last 11 hiking cycles, 8 of them ended in a recession – ample evidence that the central bank increases to the point where something in the market snaps and the economy breaks. The main reason for that (terrible) track record is central banks’ forward guidance is based on lagging economic indicators such as unemployment and core inflation. That is why monetary policy works with a long lag: last week’s hikes won’t affect inflation tomorrow, but they could change it 9 to 12 months from now.
The first of the rate hikes was just 8 months ago, so the effects are now starting to emerge and Consumer Price Index (CPI) may continue to fall. Moreover, another major driver of inflation money supply (M2) has fallen sharply (the yellow line in the graph above) which should help further ease inflationary pressures.
It seems likely that the Fed may reduce the size of its rate hikes beginning in December, but it will likely depend on how the inflation outlook evolves. At this point inflation expectations seems to be rolling over judging by the 10-year Treasury Inflation Protected Securities (TIPS).
All data points to inflation moderation, possibly signaling the end of the tightening cycle. Let’s not forget that policymakers have already responded with the most aggressive tightening campaign in 4 decades. Terminal rates have probably reached their ceiling at around 5.0 – 5.3%. Therefore, the Fed could gradually slow its pace of tightening and pause over the next six months as inflation continues to decline.
Moving from the late cycle towards the recessionary phase of this cycle here are some possible market outperformers.
Precious metals (Gold, Silver)– classical inflation hedge, historically less volatile, potential diversification, outperforms fiat money.
Health care – safe-haven investment with a history of stable revenue and earnings, very recession resilient.
Energy – the energy sector has reported massive profits this year, thanks to geopolitical events that lead to a surge in fuel prices.
Source: FidelityInvestors looking to gain exposure to the sectors mentioned above might consider:
Violeta è entrata a far parte di Leverage Shares nel settembre 2022. È responsabile dello svolgimento di analisi tecniche e ricerche macroeconomiche ed azionarie, fornendo pregiate informazioni per aiutare a definire le strategie di investimento per i clienti.
Prima di cominciare con LS, Violeta ha lavorato presso diverse società di investimento di alto profilo in Australia, come Tollhurst e Morgans Financial, dove ha trascorso gli ultimi 12 anni della sua carriera.
Violeta è un tecnico di mercato certificato dall’Australian Technical Analysts Association e ha conseguito un diploma post-laurea in finanza applicata e investimenti presso Kaplan Professional (FINSIA), Australia, dove è stata docente per diversi anni.
Julian è entrato a far parte di Leverage Shares nel 2018 come parte della prima espansione della società in Europa orientale. È responsabile della progettazione di strategie di marketing e della promozione della notorietà del marchio.
Oktay è entrato a far parte di Leverage Shares alla fine del 2019. È responsabile della crescita aziendale, mantenendo relazioni chiave e sviluppando attività di vendita nei mercati di lingua inglese.
È entrato in LS da UniCredit, dove è stato responsabile delle relazioni aziendali per le multinazionali. La sua precedente esperienza è in finanza aziendale e amministrazione di fondi in società come IBM Bulgaria e DeGiro / FundShare.
Oktay ha conseguito una laurea in Finanza e contabilità ed un certificato post-laurea in Imprenditoria presso il Babson College. Ha ottenuto anche la certificazione CFA.