Analysis: Fed feeds Wall Street's soft landing hopes, though recession fears still loom

Analysis: Fed feeds Wall Street’s soft landing hopes, though recession fears still loom

Feb 2 (Reuters) – A extra dovish-than-expected message from Federal Reserve Chairman Jerome Powell stands to additional increase hopes of slowing charge hikes and a so-called financial soft landing which have fueled a robust rebound in U.S. shares.

For weeks, hopes that easing inflation and cooling development will permit the Fed to drag again from its hawkish financial coverage outlook have boosted shares and different danger belongings after a brutal 2022.

Many on Wall Street stay satisfied {that a} broadly anticipated recession is prone to roil markets as soon as once more someday this yr. Bullish traders, nevertheless, took coronary heart at Powell’s feedback on the finish of Wednesday’s financial coverage assembly, when he acknowledged progress within the combat in opposition to inflation and appeared reluctant to push again in opposition to the rally in shares and bonds.

“At this level, the market has welcomed the truth that a few extra will increase at 25 foundation factors principally means simply marginal changes,” mentioned Alessio de Longis, senior portfolio supervisor at Invesco Investment Solutions. “The gentle on the finish of this financial cycle is coming.”

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De Longis is betting on extra positive factors in lots of the asset lessons which have thrived in current weeks, together with shares, 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. Yields on the benchmark U.S. 10-year Treasury, which transfer inversely to costs, fell after the assembly and have declined by greater than 40 foundation factors in 2023.

To make certain, Powell gave little indication that the Fed was near veering from its charge hike trajectory after it introduced a broadly anticipated 25 foundation level charge improve. He mentioned “a pair extra” charge will increase possible lay in retailer.

Still, Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, mentioned the market was cheered by the dearth of “hawkish pushback” on the broad-based rally in danger belongings, which some fear may make it tougher to include inflation. Also encouraging for traders was Powell’s repeated references to disinflation – a falling charge of inflation.

The month-to-month charge was unfavourable in December, when client costs had been 0.1% decrease than in November. It was the primary fall since May 2020.

“I feel they do see a path the place you will get that soft landing, that Goldilocks-type situation play out,” he mentioned.


Plenty of traders nonetheless heard a much less dovish message from Wednesday’s assembly, with many skeptical that policymakers would be capable of convey down the best inflation in many years with out hurting the economic system.

“We assume that the ultimate method that we are going to get inflation all the best way again all the way down to the tip goal will virtually essentially require a recession, albeit a brief and shallow one,” mentioned Kristy Akullian, a senior strategist with BlackRock’s iShares Investment Strategy workforce.

Banks and asset managers which have reiterated recession calls in current weeks embrace BlackRock, Wells Fargo and Neuberger Berman.

Meanwhile, a key a part of the Treasury yield curve, which inverted in March final yr for the primary time since 2019, remained deeply in unfavourable territory, with yields on shorter-dated debt standing above these on longer-dated bonds, a time-honored recession sign.

Others mentioned that whereas futures markets had been pricing the Fed’s key coverage charge peaking at round 4.88% in June – a peak that’s decrease than the 4.91% priced earlier than the assembly – and falling within the latter half of the yr, charge cuts would possible come that shortly provided that the economic system fell into recession.

The Fed has projected it’s going to elevate its key coverage charge to between 5% and 5.25% and maintain it there at the least till the tip of the yr, and Powell insisted on Wednesday that charge cuts weren’t within the offing.

“Do folks assume (charge cuts) will probably be in response to inflation that has been coming down or one thing extra dramatic, when it comes to financial slowdown? I’d assume the latter,” mentioned Fran Rodilosso, head of mounted revenue ETF portfolio administration at VanEck.

Nevertheless, some traders are joyful to run with the extra dovish situation, particularly if inflation retains slowing. Ed Al-Hussainy, senior rate of interest strategist at Columbia Threadneedle, is beginning to pull again on hedges in futures markets that will repay if charges hit 5%.

“We have an enormous change within the Fed’s willingness to take a look at either side of the inflation information and this time acknowledge that disinflation is going on,” he mentioned. “It seems like they’re very a lot accomplished.”

Reporting by Davide Barbuscia and Lewis Krauskopf; Writing by Ira Iosebashvili; Editing by Megan Davies

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