Powell’s message: Price stability is paramount
Published on 8th March 2023
Stocks closed lower yesterday, and the curve inversion steeper with the 2yr – 10yr spread at -106.46bp with a sharp selloff on the short end of the curve (1 and 2 years), the USD much stronger.
The full reality of the inflation fight seems to have finally surfaced at the Fed. Powell’s testimony at the Semiannual Monetary Policy Report to the Congress before the Committee on Banking, Housing, and Urban Affairs, is starkly clear and very much in line with our base case scenario of higher rates for much longer than was being priced in by markets.
Chair Powell stated, “As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
It has been a long wait, the year-to-date positive move in markets we believed was not justified; thus, we held on to a primarily defensive allocation, except for our overweight allocation to select commodities.
We expected further aggressive monetary policy from the Fed and that once up and the terminal rate level, rates will likely remain elevated for much longer than most expect. The risk the Fed will run is that the combination of high rates and time may create more significant demand destruction than the Fed forecasts. Our concern about the economic and earnings outlook is finally being more widely adopted. Powell was very clear; price stability is paramount.
One speech may not trigger the next trend, but this speech today is in line with our view. For markets, the next hurdles to get over include the US jobs report this Friday, CPI next Monday and the Fed’s March 22 monetary policy decision.
We remain of the opinion that the Fed must engineer a slowdown and get the US unemployment rate up above 4%. See below a chart we have used many times in support of our view that the US economy is operating “too hot” with unemployment far below the noncyclical rate of unemployment, thus inflation is all but certain to not only surface but remain.
Portfolio Implications – Remain defensively positioned, cash at overweight, fixed income and equities at underweight for developed markets, and overweight in select emerging markets (EM). Select EM are supported by a combination of forces, i.e., aggressive and early monetary policy response and pick up domestic consumption, which should support both stocks and bonds.
The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in GMG Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contains generic recommendation.
Non-Reliance: This document does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. GMG is not soliciting any specific action based on this material it is solely intended for illustration purpose.
This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.
This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.
The accuracy, completeness or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Subject to any applicable law, GMG shall not assume any liability in this respect.
Risk Disclosure: This document is of summary nature. The products referred to herein involve numerous risks (including, without limitations, credit risk, market risk, liquidity risk and currency risk). In respect of securities trading, please refer for more information on such risks to the risk disclosure brochure “Risks Involved in Trading Financial Instruments – November 2019”, which is available for free on the following website of the Swiss Bankers’ Association: www.swissbanking.org/en/home.
Material May Be Outdated: This material is produced as of a particular date. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. GMG is under no obligation to notify you of such changes and you should discuss this material with your GMG relationship manager to ensure such material has not been updated, modified amended and/or supplemented. The market information displayed in this document is based on data at a given moment and may change from time to time. In addition, the views reflected herein may change without notice. No updates to this document are planned. In the event that the reader is unsure as to whether the facts in this document are up to date at the time of their proposed investment, then they should seek independent advice or contact their relationship manager at GMG.
Information Not for Further Dissemination: This document is confidential and should not be reproduced, published, or redistributed without the prior written consent of GMG.