Evening Brief – 06.28.23
Central bank leaders from the Federal Reserve, European Central Bank, Bank of England and Bank of Japan spoke Wednesday at the annual ECB Forum on Central Banking in Sintra, Portugal.
Except for BoJ Governor Kazuo Ueda, who has bucked the global trend of tight monetary policy, Fed Chair Jerome Powell, ECB President Christine Lagarde and BoE Governor Andrew Bailey continued to sound a hawkish tone.
In these settings, policymakers frequently stay to the script, preferring to save major announcements for meetings.
But two important headlines emerged from Powell, who alluded to still tighter monetary policy, saying “while policy is restrictive it may not be restrictive enough, or not restrictive for long enough” and would not rule out the idea of “consecutive rate hikes” from here. Also, Powell sees the elusive 2% inflation target for Core PCE, a closely watched metric by the FOMC, not being attainable until 2025.
Powell’s message was unmistakably hawkish. The Fed Chair is attempting to cool market enthusiasm for the “skip” at the June FOMC meeting by ensuring that the markets realize it was a “skip” rather than a protracted pause.
As to the core PCE, it has remained steady at 4.7% for the past five months, even though headline inflation has fallen considerably. It’s causing the Fed some anxiety, and the FOMC is plainly expressing that concern and informing markets that the central bank still has a long way to go to slay the inflation dragon.
The markets, on the other hand, are slightly more positive. However, Core PCE has not fallen as swiftly as many analysts predicted, and the Fed has had to lift its PCE expectations by 0.3% to 3.9% by the end of the year.
In this scenario, investors may wish to consider high-yield credit markets for a better risk-adjusted return rather than overweighting the stock market. Corporate bonds with ratings of B or BB yield 8% to 11%, depending on the term structure.
Whether its structured credit loans or bonds, they provide an excellent opportunity for investors to not be fully committed to the equity markets as we go through a more volatile environment into the end of the year and early next year, as well as the lag effect of the 500 basis points of tightening so far.
Meanwhile, the latest interest rate pricing projects a 75% probability of a 25-basis point increase in July after the “skip” in June.