Monchau: Fed Likely to Stay Put

Maybe let’s just tie in some of the commentary that we’ve heard not just from Kashkari overnight, but also linking back to the Fed Chair, Jerome Powell last week about the trajectory of monetary policy in the US going forwards. And I thought it was quite interesting last week that the Fed chair pushed back against the possibility of rate hikes. And yet you have one of the more hawkish members of the committee, Neel Kashkari, saying that, well, we have to be careful. We have to be sure that inflation is on the right track before we start cutting interest rates. It doesn’t seem as though there’s unanimity on this on this panel. Not true. But we we know he’s, he’s a hawk, definitely. So there was no surprise yesterday that he shifted, let’s say the the pendulum towards you know what possibility even of a red hike. But I think Chairman Powell was was quite let’s see clear last week pushing back you know stack fishing fears but also I think that was very important tackling the quantitative tightening, tapering let’s say idea and I think that was a positive surprise for the market that both in terms of timing and amounts that’s you know they might indeed taper quantitative tightening. I think that was a positive message. But again, you know, we know that the the feds wants to see more data coming that they are likely to stay put. We still believe that the next move is going to be a rate cut, but indeed it might be later than expected and after a first rate cut they might you know stay put also for some time, let’s say to see you know next data, what they are telling us in terms of inflation but also in terms it’s funny because at the beginning of the year when I was having these conversations, the talk was about not just when were the feds going to get going, but also where they would end up. And I think now the narrative has really evolved in about in the sense that the market is expecting the Fed to start cutting interest rates later but also end up at a higher rate than they were before. That has implications on assets. Yeah, well a higher terminal rate does have implication indeed. But you know, when we look at monetary policy, you know, we’ll, we like to look at financial conditions. You know, overall if you look for instance at the Goldman Sachs Financial Condition Index, it’s still very low. So that means it’s, you know it’s a policy for the market and and that’s something we need to to take into account and look at M2 supply growth, it turns positive for the first time since December 2022. So we still have inflation being sticky, but at the same time we have loose financial conditions and monetary growth which is turning positive. And This is why, by the way, we still prefer equities of the bonds despite the fact that we’re don’t, you know, we’re not seeing interest rate cuts, you know, in the coming weeks or months. Financial conditions remain supportive for risk assets. Yeah, yeah, that’s a very good point about the financial conditions aspect of it. Let’s talk about equities. S&P sitting around 5200, it feels like it’s struggling to breakthrough that level. Will it break, can it break, do you think that we’re going to keep moving higher? You know, we think it’s it’s kind of let’s say normal to have you know to see some momentum fatigue after the very strong run We had this since October there have been let’s say various factors, you know preventing the S&P family to move higher geopolitical risk was one of them. These interest rates, let’s say uncertainties is another one. And then we started the earnings season with some doubt, you know due to banks results. Now if you look at the earnings season, we’re talking about the beat rates, you know companies on average beating expectations by 7%, they’re still quite good. So we still have these earnings tailwinds for the markets, uncertainties regarding oil prices, uncertainties regarding interest rate hike. But I think what was also very interesting last week was a job number to us. Friday was a Goldilocks report because you have unemployment rate ticking you know higher but still below 4%. You have early earnings, you know a gross decelerating. So if we have these kind of, let’s say market context where we have earnings gross, you know being a tailwinds at the same time the next let’s say rates move being a cut, we don’t know when, but it’s still going to going to be a cut. That’s what the market expects. Again, it’s a very decent background for equity markets. Yeah, I take that point. But then also you know there is a lot baked in already and I thought it was really interesting in this earnings season, yes, that the surprises to the upside have come through, but the market has not rewarded the companies that have come out with the positive surprise and if anything they’ve punished the companies that have missed. What does that tell you about positioning? Yeah, you know we entered the you know the earnings season when you look at for instance CT as or they were position hedge funds and also the cash held by long only managers definitely you know there was some catch up in terms of long positioning. So This is why I know as you rightly mentioned the bar was quite high. But see you know if you look at the guidance it you know it give let’s say some comfort that indeed companies might be able to deliver later this year. Also if you look very important things cycle, you know, we are in presidential election year. Yeah, usually there is indeed some kind of pullbacks in April, May and then the summer historically is more positive because the markets start to look, you know, at the presidential election and potentially some fiscal, you know, support coming and potentially also some monetary policy support coming.