ECB President, Christine Lagarde has changed the tone of her commentary and now holds out the prospect of a reduction in monetary stimulus, albeit on a far more timid scale than that being planned by the Fed. Only after the US mid-term elections is a Fed policy shift, back in the direction of easing, likely.
Energy and food inflation weigh especially hard on lower income households
High oil and food prices as well as political pressure from President Biden may have led to the following comment from Fed Chair, Jerome Powell. “I think the problem we’re talking about here is really that people on fixed incomes, living paycheck to paycheck, spending most or all of what they earn on food, gasoline, rent, heat … things like that, basic needs. And so inflation immediately…. forces such people to make very difficult decisions.
Growing indebtedness of lower income groups in the US is problematic
These “difficult decisions” are behind the continuing sharp rise in credit card debt in the US. Many low-income earners want to maintain their standard of living despite lower real wages (due to high inflation exceeding nominal wage increases) and need to borrow to pay their bills.
The fight against inflation could determine the outcome of the mid-term elections
The Democrats are under considerable pressure from dissatisfied “inflation losers”. An election debacle looms. Democrat attempts to retain power may involve putting even more pressure on the Fed, especially if oil and food price inflation continues to be so problematic.
Interest rate hike must be digested
Increasingly, investors are beginning to understand that the Fed must initiate a credible fight, at least verbally, against high inflation until the mid-term elections. For this reason, the global rise in interest rates has again gained considerable momentum in recent weeks, putting pressure on technology stocks in particular. As with other “growth” stocks, a large part of the expected profits of technology companies will only be generated in the distant future. Thus, tech stocks are much more sensitive to interest rates than “value” stocks, whose prices tend more to reflect current and near-term profits trends.
ECB lags behind the Fed
The ECB’s recent change in tone has also contributed to the rise in interest rates. Since the ECB is not “accountable” to any one government and older residents of peripheral countries have considerable experience of living with high inflation, the ECB’s inflation tolerance is likely greater than that of the Fed. Consequently, the ECB is likely to tighten the monetary reins less aggressively and less quickly than the Fed.
Bank of England raises interest rates by another 25 basis points
With its 15 basis point move last December 15 and a 25 basis point rise on February 2, the BoE has not only raised UK interest rates by 40 basis points, it has also officially started to “taper”. The BoE expects UK inflation to rise to as high as 7.25% in April. Its actions have contributed to the general trend towards higher interest rates and weaker equity markets, especially since four out of the nine members of the BoE’s Monetary Policy Committee voted in favor of a 50 basis point move on February 2.
First Fed interest rate hike likely in March
Given recent commentary, the Fed is likely to implement an initial rate hike at its March FOMC meeting. We expect an increase of 25 basis points and consider expectations of a 50 basis point move exaggerated.
Chinese central bank is now “alone”
With the ECB’s monetary policy turnaround, among the major central banks only China’s remains in easing mode. Also, now that the ECB is holding out the prospect of a tighter policy (albeit one that is only slightly less accommodative), the Fed can become more restrictive without risking an overly strong dollar.
Financial and economic stability
Probably the most important task of the Fed is to maintain financial stability. However, this should not be confused with the so-called “Fed put”. High stock prices, or “minimizing price drops” in the securities markets, are not part of the Fed’s mandate, even if this idea gained ground during the Trump Presidency.
Financial stability does, however, depend on developments in the bond and stock markets. A rise in interest rates that is too fast, or stock markets that collapse too sharply or too quickly, undoubtedly jeopardize financial stability and thus also the economy in the medium term. This is why the “Powell put” still exists. But it is unclear where the “strike price” is. In other words, it is not clear what scale of price declines in the securities markets might make the Fed sufficiently concerned about financial stability that it feels the need to act. More specifically, how much carnage on Wall Street is needed for a monetary policy U-turn?
Interest rate increase
It is likely that central banks will only become investor- friendly again when share prices are noticeably lower.
At all events, the central banks are likely to try and tailor monetary policy in such a way that the rise in interest rates is staggered, meaning the process of interest rate normalization will be strongly managed.
If the economy deteriorates, even minor share price falls or interest rate rises could endanger financial stability. Therefore, good economic data are probably bad news for the stock market right now and, conversely, bad economic data are likely to be good news for stocks.
Latest economic figures are disappointing
Charlie Munger, Berkshire’s vice chairman is reported to have said: “If you’re not confused about the global economy, you don’t understand it.”
The economic signals – for example, in the US labor market data- are indeed particularly confusing at present. Constant adjustments to the calculation methods of key figures such as those for consumer price inflation or changes in the seasonal adjustments of labor market data add to the confusion. Qualitatively, the following can probably be said: First, true inflation, defined as the loss of purchasing power, is likely to be significantly higher than officially reported consumer price inflation. (Incidentally, the loss of purchasing power also extends to many “investment” items, such as real estate, quite apart from the fact that hedonic, i.e., quality-adjusted, inflation indices and the changing composition of the basket of goods being considered, favor data manipulation.) Second, the US labor market is not in as good a shape as official figures, especially those for unemployment, suggest. Further recovery requires a rise in the labor market “participation rate”. At present, an unusually large number of Americans seem to be choosing not to participate in the workforce. (Perhaps, this is a side effect of high housing, stock and bond prices.) The effects of the pandemic, particularly of the latest virus variant, are also complicating the economic outlook. The latest Purchasing Managers’ index data have been very disappointing, although this could be reversed as the pandemic subsides.
Yield curve has flattened
The yield curve has risen significantly more at the short end than at the long end and is currently consistent with the scenario of a noticeable, but not dramatic, economic slowdown.
After the US mid-term elections, the Fed’s fight against inflation is likely to become less aggressive. Indeed, policy makers might then contemplate yet another shift in the direction of stimulus.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
Independent asset managers looking for a successor have several options available to them today. Many of them find themselves in this situation today. Vivien Jain examines the various scenarios and their advantages and disadvantages. Regardless of which scheme is chosen, the time factor plays a crucial role in the process. Read the full article here [...]
Independent asset managers in Switzerland are in good shape, but they agree that their numbers will decrease significantly over the next few years, as a recent survey shows. They do not yet have much to do with artificial intelligence. However, those who do use it are optimizing their investment strategy and obtaining better research material.
In the new environment shaped by FINIG/FIDLEG, the issue of succession has become crucial for many independent asset managers. In this interview, Carine Frick Delaloye examines the issue from a valuation perspective, with a focus on asset profitability. Read the full interview in German here.Voici l'intégralité de l'interview [...]
Domicile address
Aquila AG
Bahnhofstrasse 43
CH-8001 Zurich
Phone: +41 58 680 60 00
Aquila AG
PO Box,
CH-8022 Zurich
Quicklinks
© AQUILA AG I Imprint I Legal notice / Terms of use I Privacy policy I Privacy policy for employees and applicants