Is the Fed Done Hiking? With Darius Dale and Andreas Steno Larsen
Jul 26, 2023
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Darius Dale, founder of 42 Macro, and Andreas Steno Larsen join to analyze the Federal Reserve's interest rate hike, explore its impact on markets, and discuss the macro landscape. They also discuss central banks' actions, market performance, investor sentiment, inflation debate, and the possibility of a soft landing. The speakers reflect on the success of the S&P 500 despite rate hikes and tease future discussions on market vulnerabilities and predictions.
The Federal Reserve may continue quantitative tightening while cutting interest rates next year, potentially leading to rising goods inflation in the near future.
The European Central Bank (ECB) is facing a deteriorating outlook in Europe and may adopt a more accommodative stance soon.
Deep dives
Federal Reserve raises rates as expected
The Federal Reserve has announced a 25 basis points increase in the Fed funds rate, in line with market expectations. While there were no major surprises in the press conference, the Fed did hint at the possibility of continuing quantitative tightening while cutting interest rates next year. The market seems to be pricing in a positive rebound in the cyclical part of the US economy, with commodities rallying and a weakening US dollar. This could potentially lead to rising goods inflation in the near future.
European Central Bank may adopt a more accommodative stance
The European Central Bank (ECB) is facing a deteriorating outlook in Europe, with several countries experiencing contraction. The ECB's preferred recession model indicates a high probability of being already in a recession. While it's an in-between meeting with no staff projections update, there's a possibility that the ECB may decide to adopt a more accommodative stance soon. The Bank of Japan (BOJ), on the other hand, may revise up their inflation targets and adjust yield curve control in October due to the expiration of price subsidies. However, these meetings may not have a significant impact on financial markets.
Inflation and the macro outlook
There is ongoing uncertainty and disagreement around the outlook for inflation and the macro economy. Some indicators suggest a cyclical upswing and a potential rebound in inflation in the US. The market is picking up signs of a positive rebound, including rallying commodities, weakening US dollars, and movements in cyclical equities. However, the measurement of inflation is a complex issue, particularly regarding the rent of shelter category. The lag in inflation may be due to the filtering process through the economy. While some leading indicators indicate inflation has reached or exceeded 2%, it's important to monitor the potential sustainably of inflation and its impact on economic resilience.
Prospects for a soft landing and delayed recession
The probability of a soft landing in the US economy, rather than an immediate recession, seems higher. Factors contributing to this scenario include resilient private sector income, limited credit cycle vulnerabilities, labor hoarding, limited exposure to volatile sectors, and accommodative fiscal policies. Monetary tightening effects have been delayed due to longer-term loans and leases, while the wide yield versus coupon spread in corporate and mortgage indices indicates a stasis in new credit issuance. However, if the soft landing scenario plays out, inflation may firm and accelerate again, contributing to a structurally higher level of inflation.
Darius Dale, founder of 42 Macro, and Andreas Steno Larsen join Maggie Lake to react to this afternoon's historic interest rate hike by the Federal Reserve, explore the potential impact on markets, and look at what it means for the macro landscape going forward. Plus they'll be taking questions from Real Vision members.For more access to Andreas’ independent research, there’s a 40% discount exclusively for the Real Vision community using the code RV40 at Steno Research: https://www.realvision.com/steno