For fund titans angling to surf the markets’ churning tides, the next six months could be a wipeout. As the Federal Reserve wages war on stubbornly entrenched inflation, portfolio masters are scrambling to gauge when – and if – the central bank will finally grasp the elusive rate cut lifeline.
This week, a scorching hot inflation reading broiled portfolios and left markets reeling. The Consumer Price Index, that vital gage of price pressures, spiked 3.5% over the latest 12 months. Economists’ 3.4% forecast was left smoldering in the ex machina bonfire.
The hotter-than-expected print incinerated investors’ expectations for an imminent Fed rate cut. Bets on a reduction this month were torched, plunging from 60% to a mere 12% possibility. The chance of a cut by July, which had been fully priced in, also went up in flames – now hovering around just 50%.
In the ashes, a harsh new reality has taken shape. Markets are now only forecasting two measly quarter-point rate cuts for the entirety of 2024. For the first time, Wall Street sees fewer cuts coming than the Fed itself, which has projected three.
It was a harrowing wake-up call after many had grown complacent pricing in aggressive easing. In the fallout, searing bond market moves left the 10-year Treasury yield charred at 4.54% – its loftiest pyrotechnic display since mid-November’s skyrocketing levels.
“Dismissing this as a temporary flare-up is becoming seriously naïve,” warned Jim Reid, Deutsche Bank’s global credit strategy cinephile. “The terrifying prospect is that inflation remains stubbornly, ruinously embedded above the Fed’s target. We’re circling back to the horror of late 2021’s opening act – when it became bone-chillingly clear the initial price surges weren’t just a fleeting trick of the light, but a more malignant villain intent on persisting.”
For funds trying to navigate the macabre maze, the punishing inflation psychodrama has been harrowing. Take the ill-fated Xtrackers S&P 500 Equal Weight UCITS ETF, whose popularity doomed it become a rubbernecking exhibit in this week’s mass-disgorging. Despite $2 billion in hopeful inflows last year, the fund plummeted a brutal 1.6% in the wake of Wednesday’s data massacre – its worst single-day mutilation since February’s flesh-lacerating rout.
In contrast, the “Magnificent Seven” tech megacaps escaped with just a 0.2% mere flesh wound on the same blood-stainedday. But in this economic slasher film, there are no fridge guarantees for anyone.
For the brave fund selectors still clinging to their holy “don’t fight the Fed” maxim, the current savagery may yet give way to an cathartically uplifting final reel. Despite the markets’ gruesome loss of faith, the central bank remains steadfastly confident in its projections for three drop-forged rate cuts in 2024’s closing chapters.
At Pictet Asset Management, senior economist Nikolay Markov’s modelling foresees the Fed’s climactic target rate plunging a full 100 basis points by year’s end to 4.3%. A cathartic shower of easing that could finally douse the economy’s feverish price flames, if the heroic central bank can slay inflation’s remorseless menace.
For those portfolio warriors with the grit to withstand the current CHUaD carnage, opportunities may soon arise to start pivoting from defense tooffence. Assets like commodities that tend to wither when price pressures abate could soon be ripe for disarming. Simultaneously, intrepid Duration snipers may be able to score fresh tactical victories by sharpening their aim.
But make no mistake – these markets are far from a tedious game of shooting fish in a barrel. Only the most steeled, remorselessfund chosen will exit 2024’s macroeconomic abattoir still walking. The rest seem destined to simply become fodder for the grinder, more grisly Guts slathered across inflation’s unquenchable blade.
It’s kill or be killed out there. Guide your client’s capital with the utmost caution…or it could get Chainsaw Massacred along with everyone else’s.
