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Inflation, the Fed and Portfolio Positioning

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  • Fed remains hawkish with 6th rate hike this year
  • End of the tightening cycle in sight?
  • Which sectors outperform the market at this stage

The lift-off in rates continues

Source: Bloomberg. Federal Funds Target Rate – Upper Bound (FDTR Index)

Last week the Fed raised rates by a 4th consecutive 75 bps rate, something widely expected by investors given that inflation is running at multi-decade highs. Markets were not surprised and Fed Chair Jerome Powell said “It is very premature, in my view, to think about or be talking about pausing our rate hikes” adding that he did not believe the Fed had yet “overtightened,» leaving the door wide open for the pace of rate hikes to remain aggressive.

Worried Investors

Despite the cautionary tone by Powell, investors remain anxious as the Fed tends to lift rates until something in the markets goes awry. During the last 11 hiking cycles, 8 of them ended in a recession – ample evidence that the central bank increases to the point where something in the market snaps and the economy breaks. The main reason for that (terrible) track record is central banks’ forward guidance is based on lagging economic indicators such as unemployment and core inflation. That is why monetary policy works with a long lag: last week’s hikes won’t affect inflation tomorrow, but they could change it 9 to 12 months from now.

Source: Bloomberg. Federal Funds Target Rate – Upper Bound (FDTR Index)

The first of the rate hikes was just 8 months ago, so the effects are now starting to emerge and Consumer Price Index (CPI) may continue to fall. Moreover, another major driver of inflation money supply (M2) has fallen sharply (the yellow line in the graph above) which should help further ease inflationary pressures.

It seems likely that the Fed may reduce the size of its rate hikes beginning in December, but it will likely depend on how the inflation outlook evolves. At this point inflation expectations seems to be rolling over judging by the 10-year Treasury Inflation Protected Securities (TIPS).

All data points to inflation moderation, possibly signaling the end of the tightening cycle. Let’s not forget that policymakers have already responded with the most aggressive tightening campaign in 4 decades. Terminal rates have probably reached their ceiling at around 5.0 – 5.3%. Therefore, the Fed could gradually slow its pace of tightening and pause over the next six months as inflation continues to decline.

Moving from the late cycle towards the recessionary phase of this cycle here are some possible market outperformers.

Precious metals (Gold, Silver)– classical inflation hedge, historically less volatile, potential diversification, outperforms fiat money.

Health care – safe-haven investment with a history of stable revenue and earnings, very recession resilient.

Energy – the energy sector has reported massive profits this year, thanks to geopolitical events that lead to a surge in fuel prices.

Source: Fidelity

Investors looking to gain exposure to the sectors mentioned above might consider:

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Violeta Todorova

Senior Research

Violeta se unió a Leverage Shares en septiembre de 2022. Ella gestiona la realización de análisis técnicos, investigación macroeconómica y de acciones, y ofrece información valiosa que ayuda a la definición de estrategias de inversión para los clientes.

Antes de unirse a LS, Violeta trabajó en varias empresas de inversión de alto perfil en Australia, como Tollhurst y Morgans Financial, donde pasó los últimos 12 años de su carrera.

Violeta es una técnica de mercado certificada de la Asociación Australiana de Analistas Técnicos y tiene un Diploma de Postgrado en Finanzas e Inversiones Aplicadas de Kaplan Professional (FINSIA), Australia, donde fue profesora durante varios años.

Julian Manoilov

Marketing Lead
Julián se unió a Leverage Shares en 2018 como parte de la principal expansión de la compañía en Europa del Este. Él es responsable de diseñar estrategias de marketing y promover el conocimiento de la marca.

Oktay Kavrak

Head of Communications and Strategy

Oktay se incorporó en Laverage Shares a fines de 2019. Él es responsable de impulsar el crecimiento del negocio al mantener relaciones clave y desarrollar la actividad de ventas en los mercados de habla inglesa.

Él vino de UniCredit, donde fue gerente de relaciones corporativas para empresas multinacionales. Su experiencia previa es en finanzas corporativas y administración de fondos en empresas como IBM Bulgaria y DeGiro / FundShare.

Oktay tiene una licenciatura en Finanzas y Contabilidad y un certificado de posgrado en formación empresarial de Babson College. También es titular de una certificado CFA (Chartered Financial Analyst).

Sandeep Rao

Investigación

Sandeep se unió a Leverage Shares en septiembre de 2020. Está a cargo de la investigación de líneas de productos existentes y nuevas, clases de activos y estrategias, con un enfoque particular en el análisis de eventos y desarrollos recientes.

Sandeep tiene una larga experiencia en los mercados financieros. Comenzó en un hedge fund con sede en Chicago como ingeniero financiero, su carrera abarcó varios dominios y organizaciones durante un período de 8 años, desde la División de Prime Services de Barclays Capital hasta (más recientemente) el Equipo Index Research de Nasdaq.

Sandeep tiene una maestría en Finanzas, así como un MBA del Illinois Institute of Technology de Chicago.

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