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Monday, March 27, 2023

What the Fed minutes and the investor’s decision hide in rates, stocks and bonds

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Usually the “minutes” are known with a delay of several days. In other words, they are a somewhat backward record of the discussions that the FOMC members had. In this case, the data released yesterday give an idea of ​​what happened at the meeting on February 1 regarding the latest rate hike of 25 basis points (a rate of 4.75%). The key question: Is it possible to infer how long the FOMC members expect the policy to increase rates to be maintained? Now we see. But there is more: after the publication, John Williams, president of the New York Fed, and member of the FOMC, came out to speak to calm investors’ doubts.

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According to the FOMC analysis, the US economy remains on the rise. For this reason, they maintain that new increases in the rate will be necessary. consulted by Ambit, Alberto Bernal, head of XP Investment, points out from Wall Street that the statement qualifies as “appropriate” the rises of 25 basis points. In other words, further hikes of the same magnitude could be expected as the Fed approaches a terminal rate. On the other hand, members have acknowledged that the chances of a recession are “high”, and they hope that the labor market will become “more docile”.

Another piece of information: the rate decision, the opinion of the Committee, was unanimous regarding the need for new increases in the rate, since they do not consider it appropriate or beneficial to “pause” the cooling policy. Ergo, more increases are coming, probably all of 25 basis points.

The look of XP, Delphos and IEB

But there is a not minor detail. From the firm XP they consider the minutes as “outdated”, since, they maintain, they do not have the latest data published on the resilience of the economy. They believe that both the January inflation data (CPI of 6.4%) and the resistance of the labor market (the creation of 517,000 new jobs) would be necessary to assess the current situation.

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“These indicators are consistent with the latest words from officials regarding the future of monetary policy, since they affirm that it will continue to be restrictive for longer, at least until signs of inflation convergence appear to approach the target of 2 %”, they pointed out in XP and added: “we reiterate that the effect of the cumulative tightening on the US economy will become increasingly evident throughout the year due to the lagged impact of monetary policy, which requires a cautious approach in the coming decisions”.

And they add: “the Fed should not continue adjusting monetary policy, given that […] further hikes would increase the risk of excessive tightening and provide little or no additional relief on inflation.” “We believe that the latest data will force the Fed to continue with its tightening cycle and raise rates by 25 basis points one or two more times,” they clarified.

Vital information, today

On the other hand, a new piece of information that will be relevant is that which will be published during the day. The second estimate of the Gross Domestic Product (GDP, or GDP for its acronym in English) for the fourth quarter (Q4) of 2022 will be released. Data that is relevant to see the development of the economy, which resists policies monetary cooling by the Fed. The first estimate of last month has exceeded by 0.4% growth expectations that were 2.5% for Q2.

Leonardo Chialva, a partner at Delphos Investment, and one of the voices most listened to by investors, spoke with Ámbito. The analyst explained that this measurement “is data that would further confirm the inflationary decline estimated by the markets.” Be careful, then, because this information could also determine the new direction of the rates.

what will happen tomorrow

There is more. The CPE core will be released on Friday morning. This index reflects the change in prices of consumer goods and services (excluding food and energy due to their high volatility), which is why it is the main indicator of inflation experienced by the US population. What is relevant is that this figure is the one chosen by the FED to determine its monetary policy, especially since unlike the Consumer Price Index (CPI), the PCE is “chain-weighted” (weighted). Therefore, it reflects changes in consumer habits.

The consensus estimate for January is for an increase of 0.4% (according to the evaluation made by Bloomberg analysts), while during the month of December prices have increased by 0.3%. This rate would be the highest in 5 months, despite the fact that on an annual scale the figure tends to fall. The core PCE is projected to decline from 4.4% to 4.3% in January.

Bonds, risk and recession

“With the Fed still in tightening mode, markets are likely to move in no clear direction,” said Leonardo Chialva of Delphos. Therefore, he maintained that “adding risk within one’s own portfolio is a game for the few.” He said that there can be two scenarios to do so: “those associated with panic or after strong adjustments.”

From Investing in the Stock Market (IEB) they agree that the movements to follow are those with greater liquidity in buying and selling, prioritizing “high credit quality with short duration” as a global macro strategy.

From IEB they observe that, unlike last year, the sectors related to growth were the most defensive so far this year. However, Chialva mentions that the risk market “is not […] to go up once it has run enough, because valuations in general terms still remain high for a moment of upward adjustment of interest rates”.

Regarding the steps to follow, from Delphos Investment they clarify that in addition to the Argentine electoral and political scenario, “the global context is what matters most.” At the moment the words, indexes and decisions of the FED are those that transform the field of betting. “I do believe that we will be subject to movements in the long part of the North American curve, which priced in a recession and therefore you will find yourself looking closely at the activity data,” confirmed Chialva.

“If the recession doesn’t happen on its own, the Fed will end up inducing it,” IEB said in a report. Both the lagged pace of deceleration in inflation, and the combination of words from FOMC officials seem to indicate that “the Fed still has work to do and that when it can reach a restrictive rate level, it would stay longer than expected”, according to Investing in the Stock Market.

Therefore, at least until a clearer picture of the inflation figures and “the magnitude of the recessive scenario” can be seen, from IEB US Treasury bills stand out as an investment alternative. This is thanks to that “the change in rate expectations continues to cause a deterioration in the prices of the different debt instruments,” remarked IEB.

Source: Ambito

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