In this newsletter, we look at the implications of a Federal Reserve Bank (FED) pause on interest rate hikes and the likely effects of a pause on global markets. The next FED meeting is scheduled for 13-14 June and all eyes will be on whether Jeremy Powell the FED chair announces a pause on rate increases or an additional increase of 0.25%.
Since early 2022 we have seen a knee-jerk reaction by the FED and other global economies to runaway inflation which swept the globe in early 2022. Instead of tapping the break gently and raising interest rates gradually to slow runaway inflation, The FED ripped up the handbrake by raising interest rates from 0% – 4% in 12 months causing global equity markets to go into a sharp decline as companies and markets grappled with a new dynamic of inflation and interest rates instead of the norm for the past decade of cheap liquidity and zero inflation.
As we head into next weeks FED’s meeting the market is pricing in a 64% chance that the FED will halt at current interest rates of 5% – 5.25%. This will be seen as a victory against the war on inflation and the hope then is for a soft landing for the US economy which is on the brink of entering into a mild recession. Signs are improving with unemployment numbers rising to the highest levels seen in the past 2 years (post covid), consumer spending numbers are also slowing across all major consumer classes.
So, what to expect if the FED hits the pause button?
Market experts are estimating a likely uptick of between 10% – 15% in global equities over the next 6-12 months as a recovery rally is set to kick in. It will, however, be choppy as information on the state of the US economy and consumer health is released over the next 6 months. To date, we have seen a significant recovery in US markets with the S&P 500 up approx. 12% (USD) and the Nasdaq is up approx. 27% (USD). This recovery has however been extremely concentrated primarily in Tech stocks which have seen a huge jump based on leading the charge with some eye-watering numbers being seen in companies such as Nvidia (+113%), Netflix (+104%), Tesla (+90) Meta (+119%). The recovery as stated has been extremely concentrated and most of the named stocks have lost similar amounts in the 2022 correction. What has been disappointing is the wider market recovery in Mega cap consumer stable stocks and mid to large-cap stocks which are generally first to recover when there is a market recovery. Our view is that these stocks will be next to start the recovery and will be major benefactors of a FED rate pause.
Let’s wait and see what next week holds, we could all do with some a strong recovery rally after the dogged 2022 year for global markets.
Have a great weekend, and stay warm.
