● The fed has a dual mandate, first that of reaching an inflation reading in line with their long-range target of 2% and second doing that while achieving maximum possible employment in the economy. The fed is not so concerned about the stock markets in the short term and is willing to engineer a recession to achieve this dual target. ● The fed has been successful in bringing down inflation, though it is still far away from the 2% target. The job market remains very strong with 1.6 openings available per job seeker. Powell has made it clear that they are very focused on the inflation fight and rate cuts will be off the table till they are close to achieving their mandate.
● Rashmi expects the Fed's announcement to be positive for the tech sector as we do have a pause in rate hikes. However, she does not expect a bumper reaction from the stock markets. It is negative for small and medium businesses as they get more impacted by credit tightening due to higher interest rates as well as the tighter lending standards due to the ongoing turmoil in the regional banking sector.
● If we see the S&P advance this year, the breadth has been very narrow, mainly driven by 9-10 large mega cap tech stocks. The rally in these stocks has been driven by a reversion of last year’s performance, expectations of interest rates/yields peaking or coming down and some structural drivers. Nasdaq has led the rally in U.S stocks so it is fair to expect some consolidation in the near term. Going forward earnings should be the main driver and stocks which are able to outperform expectations will maintain their lead in the market. Given expectations of a recession and a slowdown later in the year, investors will focus on not only earnings but also the guidance. Given the economic backdrop, I expect managements to be cautious in their forward guidance. Here the companies with structural growth drivers are at an advantage.
● The banking sector has underperformed year to date. The U.S earnings season will start with the banks. We can divide the U.S banks into 2 buckets, the regional banks, and the large banks. Regional banks have seen deposit outflow. Larger banks have been the beneficiaries of this outflow. However overall, the banks have seen deposit outflows to money market funds which are guaranteed by the Government and offer higher rates. I would be cautious on Regional banks despite the underperformance as we do not know the exact impact on earnings, and they will be adding to their reserves. The larger banks have less risk compared to regional banks.
Nabil described the recent events as a “Lehman brothers moment” for the VC ecosystem and regional banks and emphised the need for regulators, regional banks and VC to focus on risk management.
The positive steps taken from the regulators as they step in to calm markets and attempt to control the contagion and panic.
Going forward Nabil sees positive implications for UAE and Saudi banks as some of the money will flow to the region, and also sees value in some of the larger global banks.
● Fed Chairman Jerome Powell’s testimony before the Banking Committee and its implications for interest rates and the U.S economy. Jay Powell was hawkish as we saw stronger than expected consumer spending, inflation, and unemployment numbers in January. He suggested that while monetary policy has had impact in slowing down inflation from the peak in June last year, there is still work to be done and Fed is open to increasing the pace of rate hikes if suggested by the totality of incoming data. This had a negative impact on the stock markets as a higher probability of a 50bps rate hike in the March FOMC meeting got priced in, whereas prior to his testimony consensus was leaning towards a 25bps hike in March.
● It is essential to note that we have two important incoming data points before the FOMC meeting- the payroll data on Friday and the CPI data next week. The Fed is very likely to depend on these data points to decide about the quantum of rate hike in March, if these suggest continued strength in inflation and unemployment a 50bps rate hike is very likely.
● The strong employment data in Jan was also due to some exogenous factors such as an unseasonably warm January, which pulled forward some temporary job openings and the fact that tech layoffs will take some time to reflect in numbers as employees are given 2–3-month notice periods. That said the job market remains strong and it will take some time before we can expect a reasonable slowdown.
● Currently a 5.6% terminal rate is priced in, however we cannot rule out a 6% terminal rate if the incoming data remains strong.
● Do not expect any other strong statements from Wednesday’s testimony.
Article from: Global Investor Group
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