October 4, 2022

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No upside in sight, more details on Balance Sheet rollout from Investing.com

© Reuters.

By Alessandro Albano

Investing.com – It’s no easy task for Jerome Powell. On the one hand, there is a market at the level of the Volcker era, and on the other hand the market has entered the correction stage and has not yet retreated with the new economic cycle that followed the epidemic. Traders do not expect a change in policy in tonight’s decision (20:00 CET), but they will pay close attention to the forward steering Especially at the beginning of the budget tightening.

Analysts from Bank of America (NYSE:) say, while Societe Generale (PA:) is to release the bank “will reject market expectations of more than four increases for 2022”.

A 7% rise in prices, along with a rapid recovery in the labor market, necessitated the normalization of monetary policy, as the Federal Reserve said at its last meeting in December that it would end its emergency asset purchase program in March, indicating at least three hikes in the benchmark interest rate in 2022.

Get used to context (almost) zero minimum, The markets went through a period of adjustment but now, according to the futures of the exchanges, 4 price increases are being incorporated into the prices. What surprised him most, according to many analysts, was the announcement of the start of budget execution, a path that could trigger a liquidity shock in markets accustomed to constant central bank interventions.

“The rumors about the balance sheet downsizing came as a bit of a surprise,” Stéphane Meunier, chief investment officer at Lombard Odier Private Bank, wrote in a research note. Thanks to asset purchases, the Federal Reserve has more than doubled its balance sheet since the start of the pandemic: Total assets jumped from $4.2 trillion in February 2020 to $8.8 trillion earlier this year, equivalent to 40% of the country’s GDP. Product “.

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But why is this important to investors? During the pandemic, Mounir explains, “the strategy of common sovereign bond buying – limiting the pool of safe assets available to investors – combined with historically low interest rates, calmed markets and pushed stock indices to record lows.” Now that this support has waned and rates are about to rise, this will have “ramifications for all asset classes”.

“In economic terms – the IOC adds to the Swiss bank – we just have to ask ourselves when rate increases will start to slow US growth. As an answer, we can look at the cost of capital, comparing the growth of the economy’s productive capacity. 10-year inflation-adjusted interest rates Real rates have risen from -1% earlier this year to around -0.75% currently, their highest level in nine months, and despite the hikes, will remain historically low: May face the three rate hikes of 25 basis points expected. 2022 will also have difficulty bringing US real rates into positive territory in 2022. The previous cycle peaked in 2018 with real rates at 1% and the 10-year nominal rate at 3%.”

What does this mean for asset classes? According to the manager, stocks will do well through 2022, absorbing the impact of higher interest rates as long as economic growth remains strong. Protect their revenue from rising costs such as inventory of value.”

To a lesser extent, notes the expert, “Even selective cyclical names should benefit from strong economic activity, while smaller companies appear to have attractive valuations.”

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In line with policy normalization in the US and the eurozone, Lombardier-Odier focuses on “short-term bonds and variable rate corporate debt,” while at the asset class level “we underestimate both government bonds and credit. Investment grade versus credit in Asian dollars and Chinese renminbi debt.” which offer portfolio diversification possibilities.”