Weekly house view | Hawkish Fed Pause Expected
After the European Central Bank raised the deposit rate to an all-time high of 4% last Thursday, this will be a busy week for monetary policy. To summarise, our expectation is for the Federal Reserve to leave rates unchanged this week. But while we believe the 25 bps hike in the Fed funds rate in July was the last in the current cycle, we believe the Fed will remain vigilant on the inflation front, with rate cuts unlikely until well into 2024. True, the latest University of Michigan’s survey shows one-year inflation expectations falling to 3.1%, their lowest level since March 2021, but consumer spending is running hot and so-called ‘supercore’ inflation (which excludes food, energy and housing) remains sticky. We believe the Bank of England will opt for one last rate increase this week (bringing the bank rate to 5.5%) given that annual pay growth in the UK is still running at almost 8%. We also think the Swiss National Bank will opt for a last 25 bps rate hike, given persistent worries about domestic inflation. Finally, while we expect the Bank of Japan to leave interest rates unchanged when it meets on Friday, its policy statement will be worth parsing in light of governor Kazuo Ueda’s hints of a possible end to negative interest rates in Japan. Our own view is that we could see yield-curve control removed in the second half of 2024 and although lifting the BoJ’s negative interest-rate policy may take longer, we believe it is a question of when, not if.
On the corporate front, the Nasdaq listing of a major UK chip designer caused a flurry of excitement last week, since it ended an almost two-year drought in major public offerings. The successful listing has ignited hopes that we will see a revival in public listings. With a lot of cash on the side-lines, we could indeed see more flotations—but much will depend on companies and their backers adapting their expectations in terms of valuations. M&A activity is also showing signs of picking up, with a multimillion-dollar deal in the packaging industry in the offing. But here too, much will depend on rates and markets remaining stable (not a done deal) and valuations becoming more reasonable.
A potentially damaging auto industry strike has gotten under way in the US. We see the US auto industry strike as another sign of a worsening of labour relations in the country that could well dent its growth prospects in the coming quarters. The car industry is also the focus of tension between the EU and China. Retaliation against Brussel’s announcement launch of a probe into China’s electric vehicle subsidies is a real possibility. Against the backdrop of sluggish global growth, the chance of another trade spat between major economies would certainly be bad news. The Chinese economy itself is showing tentative signs of improving, but the property sector remains a source of worry. And we continue to monitor a tight oil market, with prices already close to our year-end target.