Fed to Maintain Rates Amid Promising Inflation Data

July 26, 2023: As the Q2 earnings season unfolds, investors are keenly watching the Fed Reserve’s next move regarding interest rates. Ahmed Riesgo, the Chief Investment Officer at Insigneo, sheds light on the key takeaways from the earnings reports and provides insights into the Fed’s potential reaction to cooling inflation data.

Key Takeaways from Q2 Earnings So Far:

Ahmed Riesgo emphasizes that it’s still early in the earnings season, but some concerning signs have emerged. The disinflationary pressures seen in some companies, such as Ford, Electrolux, and Volvo, may become a headwind for earnings in the year’s second half. While the macro level welcomes these trends, they could impact corporate profits.

The Fed’s Potential Reaction to Cooling Inflation Data:

Riesgo addresses the likelihood of further interest rate hikes or cuts by the Federal Reserve. He notes that the inflation trend is clear: it’s on a disinflationary path. This is good for the overall macro environment and the US economy. However, it might pose challenges for companies in the year’s second half.

Market Sentiment and Strategists’ Perspectives:

Ahmed Riesgo points out that strategists are trying to catch their tail in the current market sentiment. Just as they turn more bullish, there might be a need to exercise caution. The rally appears technically sound and may continue, but weakness is expected in the latter half of the year.

Private Markets as an Investment Opportunity:

The discussion shifts to private markets, and Riesgo suggests that private investments will be crucial for sophisticated investors with no immediate liquidity needs. He believes public market returns may be weaker than in the past decades, which makes private investments attractive. Private credit appears more appealing than private equity due to the macro environment and valuation considerations.

Fed’s Upcoming Meeting and Market Expectations:

Regarding the Fed’s upcoming meeting, Riesgo believes that the central bank will unlikely surprise the markets. The futures market indicates a 90% chance of a 25 basis points rate hike. While Riesgo doesn’t support further rate hikes, he expects the Fed to signal that this might be the last one for this cycle. A clear indication of halting further rate hikes would be essential to sustain the recent market rally.

Fed’s Dilemma – Inflation and Recession Concerns:

Riesgo touches on the Fed’s challenges, balancing inflation concerns and the risk of a recession. He notes that the Fed might have waited too long to start the rate-hiking cycle. Overextending rate hikes could lead to a soft landing being less likely, and a US recession may begin in the middle of next year.

In Conclusion:

As the Q2 earnings season progresses and the Fed’s meeting approaches, investors closely monitor inflation data and Fed signals. Market strategists advise caution amidst the current rally and consider private credit an attractive investment option. The Fed’s actions and messaging will significantly influence market momentum and future economic conditions.