If nothing else, I took one thing away from this week’s Fed decision: don’t expect rate cuts anytime soon. The market had priced in a 25 bps rate increase – with the Fed flagging it well in advance. And the Fed didn’t disappoint. But what they were hoping for was more of “dovish hike” It wasn’t coming… Powell is keeping things tight-lip. And he has good reason to… he (like the market) simply doesn’t know what lies ahead. And whilst things appear to be trending in the right direction – it’s far too premature to call a victory over unwanted inflation
"Interest Rates / Bonds"
What Banking Crisis?
Are things actually looking up? If your measure is the equity market… you would say absolutely. Stocks continue to charge higher on the back of lower inflation and optimism the Fed is closer to the end of its hiking cycle. What’s not to like? However, there’s something else giving markets a boost. Easy money! Financial conditions are as easy as they’ve been all year. For example, it was only 4 months ago and we had a mini banking crisis… where funding was a lot tighter. That’s now a distant memory.
Fed Can Keep Raising w/Core CPI 4.8% YoY
The market celebrated the June monthly CPI data. Headline CPI came in at just 3.0% YoY – and Core CPI fell to 4.8% YoY. Good news. However, with Core CPI still more than 2x the Fed’s target – expect them to raise rates again at the end of the month. However, what surprises me is the market believes the war with inflation is basically done. Is it? I think that is presumptuous. The fight with Core inflation will be a long one. If correct, the Fed may not need to keep raising rates aggressively – however are likely hold them there until their objective is met.
Think About Adding Bonds
For me, 2023 has been a year of repositioning and managing risk. I lowered my exposure to large-cap tech (down to ~20% portfolio weight) and increased exposure to banks, energy and some industrials (which all trade at reasonable valuations). Today I will look at two bond ETFs – which I think could warrant exposure in your portfolio. In summary, with the US 10-Year yield back above 4.0% – it pays to add some longer-term duration.
For a full list of posts from 2017…