Risk-taking sentiment continued last week, with central banks remaining the catalyst.
Last week, the Bank of England raised the rate by 25 basis points, and the National Bank of Switzerland surprised the rate increase by 50 basis points. In developed markets (DM), the Bank of Japan has overcome the upward trend in interest rates, leaving policies and interest rates unchanged. In emerging markets, Brazil raised rates by 50 basis points, Hungary exceeded expectations by raising rates by 50 basis points, and Taiwan did not achieve results by raising rates by only 12.5 basis points. The Federal Open Market Committee (FOMC), which has never been bypassed by the central bank, has raised interest rates by 75 basis points, the largest increase since November 1994. Not surprisingly, President Powell told a news conference on June 15 that he “don’t expect movements of this magnitude to be commonplace. “Financial assets did not appreciate these increases, and government bond yields rose (except in Japan). As credit spreads widened last week, we noticed that high US yields were lower and investment grade loans in emerging markets outperformed overall returns. Taking this into account, if today were the end of the year, it would be the worst year of overall return for investment grade credit markets since the creation of the ICE BofA indices.1. Shares are declining and DM is lower in EM, even as commodity prices fall as prices rise in markets with an increasing likelihood of recession.
The conclusion from last week’s price action is that markets will remain very sensitive to inflation. President Powell justified the abnormally high increase in interest rates by Friday’s CPI data, which exceeded expectations, as well as the increased inflation forecast of the University of Michigan for 5-10 years.2.
Second, we are now close to setting a final rate for US interest rates of 4.00 to 4.25%. US monetary policy has shifted from a policy of reconciliation to a policy of restraint; mortgage rates are 5.94% (levels not seen since 2008), real rates are positive after 3 years, and the market, which was ahead of the Federal Reserve (Fed) in this cycle policy, now forecasts a reduction in the base rate in 2023, with planned Fed cuts that will begin in 2024 (see schedule of the week Citi Research). On a relative basis, the profitability of the US Treasury is currently not growing as fast as the profitability of European ones.
Finally, the benefits of emerging markets, both credit and stock markets, are the result of diversification, especially from Asia (which accounts for about 40% of global credit indices in emerging markets). In Asia, there is less concern about inflation, as shown by the actions of the central bank in the region this week. In addition, the two main drivers of growth in the region, Japan and China, continue to support growth through policy adjustments and, in the case of China, further policy easing.
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This material should not be construed as a forecast, research or investment advice, nor is it a recommendation, offer or call to buy or sell securities or to pursue any investment strategy. The views expressed by Muzinich & Co. are effective as of March 2022 and are subject to change without notice.