As expected, the US regulator yesterday for the third time in a row by 75 basis points to 3-3.25%. Markets, however, reacted with a sharp drop:
▪️ The index fell by 1.71%,
▪️ by 1.70%,
▪️ Composite at 1.79% and
▪️ by 1.42%.
▪️ , in turn, jumped above 111.
It seems to be nothing unexpected. 0.75 expected. Moreover, the markets feared that the Fed would give up and raise the rate by 1 percent at once. All this (0.75) was, of course, already “hardwired” into the price. What happened?
In principle, we have previously paid attention more than once. The main thing is not how much Powell will raise the rate, but what he will say next. So the backlash is partly due to the persistence of more than specific hawkish rhetoric.
Powell made it clear that the rate will be raised to a restrictive level (above neutral). This is something new. And a very strong statement.
How much it?
Apparently, well above 4.5 percent per annum. Moreover, apparently, this year the rate can be raised at least two more times (November and December). And quite possibly at least 100 basis points combined.
That is, by the end of the year we may well see 4.4-4.5 percent. And by the end of 2023, perhaps even higher – 4.6.
Restrictive PrEP can continue for quite a long time – as long as necessary to achieve the targets.
Thus, high rates will remain above the neutral level until the visible results of tightening appear. Quite possibly, well over a year.
The problem is that monetary tightening is pushing the US economy closer to recession. Speaking of forecasts, expectations for 2022 are sharply lowered.
▪️ Instead of 1.7% to 0.2%. US GDP growth in 2023 is also revised. The forecast is 1.2%, instead of the previously expected 1.7%. In fact, it’s a recession.
▪️ was also revised for the worse – from 3.9% to 4.4%.
▪️ The average interest rate next year is expected to be 4.6%.
▪️ QT can also add fuel to the fire – doubling the limit on sales of debt securities – to $60 billion for treasury bonds and $35 billion for mortgage bonds. Previously, the Fed sold $30 billion worth of Treasury bonds and $17.5 billion of mortgages every month.
Finally, we heard very harsh words from the head of the Fed that restoring price stability after reaching a “soft landing” may not be easy. Translating into Russian, one can expect an increase in turbulence in the markets in the future. And then it’s not clear for a long time?
By the way, according to Ray Dalio’s forecasts, an increase in rates to 4.5% will lead to a drop in prices for US stocks by almost 20%. Well, to be honest, even without Ray Dalio, we were expecting back in July that the S&P index would walk by 3200-3600 by December. Well, so far everything is going according to this forecast.
I want to draw attention to one very interesting point. We are talking about US government bonds with maturity in 20 years or more. At the webinar, we gave a few ideas – how to make money on them. So… a funny thing. Yesterday on the increase in the rate and on such formidable words of the financial thunderer – plus 1.7 percent. – plus 4.6 percent.
And the potential for these positions is quite good.
But what about protective tools?
▪️ – plus 2.3 percent.
▪️ – plus 4.4 percent.
▪️ – plus 5.5 percent.
▪️ – plus 3.2 percent.
If the S&P really reaches 3200, these instruments have a chance to grow by tens of percent.