The Fed, China
Overnight, equity markets fell (mostly the US, Europe was closed by the time of the Fed’s announcement) as Jerome Powell outlined a slower pace of rate hikes, but a potentially more persistent (longer, more drawn out) peak rate environment.
After a pretty strong run for markets, over the past month, that’s not too bad a reaction, overall, from risky assets, in the face of disappointment.
There’s not much that’s surprising about any of that. Stocks and bonds look good value to us, and the Fed is acknowledging that we can pull back from further hits of 75-75-75, and that there are some signs of softening in labour, some softening in the overall economy, that would permit an eventual change in stance.
The key bit is below, the acknowledgement that there are long and variable lags to monetary policy, and there’s a lot of tightening already in train. This reduces the odds they inadvertently overshoot (as in “don’t worry, we are paying attention to this issue”).
Overall, we interpret last night as progress towards a “prudent pause”, and we will be fairly happy to continue putting cash to work as markets fall.
The story from China is a rumour that administrators plan to pull back from COVID zero, and begin the process of reopening the country.
That put something of a rocket under China centric shares, these past couple days, that the rumour has been building, and also placed upside pressure on commodity prices.
Eventually, China has to abandon that particular strategy. The only thing that works is vaccination, and whilst we’ve not heard of approvals being granted for the more effective non-China produced vaccines, or of a more effective local equivalent hitting the market, eventually it will get there.
So, we are unsure of how much stock to put in the rumour, and won’t be making asset allocations just yet, until things are clearer, for that particular trade.
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