Analysis – Fed fuels soft landing hopes on Wall Street, though recession fears still loom

By David Barbuscia and Louis Krauskopf

(Reuters) – A extra dovish-than-expected message from Federal Reserve Chairman Jerome Powell will increase hopes of a slowdown in rate of interest hikes and a so-called mushy financial downturn that has fueled a stable restoration in US shares.

For weeks, hopes that easing inflation and slowing progress would permit the Federal Reserve to again away from its hawkish financial coverage outlook, boosting shares and different dangerous property after a brutal 2022.

Many on Wall Road stay satisfied {that a} extensively anticipated recession is prone to roil the markets once more someday this yr. Nevertheless, bullish buyers have been inspired by Powell’s feedback on the finish of the financial coverage assembly on Wednesday, when he acknowledged progress in combating inflation and appeared reluctant to withstand a rally in shares and bonds.

“At this level, the market has welcomed the truth that the extra 25 foundation level will increase mainly imply simply marginal changes,” mentioned Alessio De Longis, senior portfolio supervisor at Invesco Funding Options. “The sunshine of the top of this essential cycle is coming.”

De Longis is betting on extra features in a number of asset courses which have boomed in current weeks, together with equities, rising markets and higher-yielding debt.

The S&P 500 rose greater than 1% on Wednesday, and is now up greater than 7% for the yr. Benchmark 10-year US Treasury yields, which transfer inverse to costs, fell after the assembly and fell by greater than 40 foundation factors in 2023.

Powell actually gave little indication that the Fed was about to deviate from the trail of a charge hike after asserting a extensively anticipated 25 foundation level charge hike. He mentioned there’ll seemingly be “greater than a pair” worth will increase.

Nevertheless, Garrett Melson, a portfolio analyst at Natixis Funding Managers Options, mentioned the market was greeted with glee by the shortage of “sturdy opposition” to the widespread rush in threat property, which some concern might make inflation more durable to include. Additionally encouraging for buyers are Powell’s frequent references to inflation – the low charge of inflation.

The month-to-month charge was adverse in December, when client costs have been 0.1% decrease than in November. This was the primary fall since Could 2020.

“I feel they see an avenue the place you’ll be able to have this mushy touchdown, a Goldilocks sort state of affairs,” he mentioned.


Nevertheless, many buyers heard a much less dovish message from Wednesday’s assembly, with many skeptical that policymakers would have the ability to carry down the best inflation in many years with out hurting the financial system.

“We imagine that the eventual means we’re going to carry inflation again to the top goal will essentially require a recession, albeit a brief and shallow one,” mentioned Kristi Akolian, senior strategist on BlackRock’s iShares Funding Technique workforce.

Banks and asset managers who’ve repeated recession calls in current weeks embrace BlackRock, Wells Fargo and Neuberger Berman.

On the identical time, a serious a part of the Treasury yield curve, which inverted in March final yr for the primary time since 2019, remained deeply in adverse territory, with short-term debt yields rising above these of long-term bonds, which has been witnessed for a very long time. recession sign.

Others mentioned that whereas futures markets pricing the Fed’s key charge peaked at round 4.88% in June — a decrease peak than 4.91% earlier than the assembly — and declined within the latter half of the yr, charge cuts are prone to come. That solely rapidly if the financial system fell into recession.

The Fed anticipated it might elevate its principal coverage charge to between 5% and 5.25% and hold it there a minimum of till the top of the yr, and Powell insisted on Wednesday that charge cuts weren’t imminent.

“Do individuals suppose that (rate of interest cuts) will probably be a response to inflation that is been coming down or one thing extra dramatic, by way of an financial slowdown? I feel the latter,” mentioned Fran Rodiloso, head of fixed-income ETF portfolio administration at VanEck. .

Nevertheless, some buyers are completely happy to take a extra pessimistic state of affairs, particularly if inflation continues to gradual. Ed El Husseini, chief rate of interest strategist at Columbia Threadneedle, has begun undoing hedging within the futures markets that might repay if rates of interest hit 5%.

“We’ve a giant change within the Fed’s willingness to take a look at each side of the inflation knowledge and this time we acknowledge that inflation is going on,” he mentioned. “Appears like quite a bit has been carried out.”

(Reporting by Davide Barbuscia and Louis Krauskopf; Writing by Ira Iosbashvili; Modifying by Megan Davies)

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