What the market expects from the Fed
The point on the markets awaiting the March meeting of the Fed. The comment by Paolo Mauri Brusa, manager of the Multi Asset Italia team of GAM (Italia) SGR.
With Powell's latest statements, the rate hike at the next FOMC meeting in mid-March is now a fact. The market currently prices at least 5 in the year and the hypothesis of a first adjustment of 50 basis points (now given with a 40% probability) assumes more and more force, even if historically there are few precedents. After a difficult month of January for the American stock markets, especially for the Nasdaq, we are witnessing a general recovery in these days. The quarterly reports of the big tech companies have reported some serenity among operators, once again exceeding analysts' expectations. On the bond front, on the other hand, the statements by the Fed and the ECB and the recent inflation measurements keep the tension and volatility on the government curves high. Also in the corporate bond segment we have seen a sudden increase in spreads, quite normal given the market sentiment. However, the strong outflow from high-yield bonds, which in the United States has exceeded $ 7 billion since the beginning of the year, did not go unnoticed. As Wall Street veterans well know, when the market approaches a bear phase, credit is the first to move, a sort of leading indicator for equity managers.
The fear at this stage is that highly indebted companies that have so far managed to finance themselves at bargain rates may go into difficulty due to the marked rise in yields, perhaps accompanied by the economic slowdown that reduces their cash flows. Consequently, the most fragile issuers are the first to be sold. Also analyzing the performance of the Nasdaq we find that all those companies in the start-up phase that still do not produce profits, and that had performed extremely well thanks to the huge liquidity poured into the markets by the Central Banks, have corrected sharply since the beginning of January. With real rates rapidly approaching the fateful zero threshold, after almost two years in negative territory, a repricing of all those segments whose valuations are based on hypothetical future growth is underway. The risk, however, is that the rest of the market may also follow the same path if monetary leverage is not carefully managed. The Fed's March meeting represents a fundamental watershed not only for the lists, but also for the economic recovery. If, as many think, inflationary pressures are destined to return in the second half of the year and then normalize in 2023, an excessive monetary tightening risks derailing the markets with strong repercussions on private savings and on the solidity of corporate balance sheets.
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This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/che-cosa-si-attende-il-mercato-dalla-fed/ on Sun, 13 Feb 2022 06:50:18 +0000.