Mar 17, 2022
The Fed meeting appears to have been more hawkish than many had expected. In essence the Fed is committed to a sharp tightening of policy with 175bps of Fed funds rate rise by the end of the year. On their forecast rates would peak at 2.75%. Interestingly, they brought down their long-term median interest rate from 2.50% to 2.375%, which seems to be at odds with everything that is going on the world at present particularly the end of trend globalisation. The markets already reflect a massive increase in the Fed rate, with the 2yr US Sov having already ramped up to around 1.8%. We continue to expect inflation to fall off in the 2H22, the eventual fall off only having been pushed out a bit by the war. US Equities were volatile initially selling off before hard rallying into the close, with the equity market for the moment taking a bet that there will be a soft landing. The IT sector had a massive run, having been one of the weaker sectors year to date. Nasdaq was up some 3.7% in the day. Bond markets have remained soft with the US 10 year at around the 2.15% level. In the past week much of the action in bond markets has been revolved around the sell-off of government bonds.China policymakers appear to be concerned about the weakness in Chinese financial markets and economy. A statement yesterday from the authorities holds out the prospect for at least a moderation of the bull dozing policies of recent quarters particularly among tech and stocks with overseas listings. Not much detail at this time, but it could provide a stabiliser on the market after the precipitous fall in the market in the past two weeks. The key challenge to a more profound rally is the large spike in COVID cases in parts of China. The authorities maintain a zero tolerance to COVID and hence the lockdowns are severe and derail growth.China equities allied strongly on the news, with JD and VIP Shop up some 35% in the day, retracing recently weakness in a hurry. This has significantly helped performance as China remains a marginal overweight for us across our various strategies.
Our View: The conflict in Ukraine continues and it is still too early to see an easy outcome here., though we do believe a peace deal seems increasingly on the cards. Should this unfold as we expect, with the conflict ceasing in the next month, we would anticipate a falloff in commodity prices and for inflation to fall off in 2H.
Separately, we continue to expect the major economies to be weaker than current consensus. Consensus on GDP growth for the year has already fallen in the first few months of the year and we expect this to continue (Consensus US GDP growth for ’22 was expected to be 4% and this has already fallen to 3.6%). This is in turn should, in our view, put less pressure on the Fed to tighten. The room for policy mistakes in this regard is significant, if they over tighten into a weaker economy.