The most frequent question we get asked these days is, “Is the Fed done?” While we are of the view that the Fed is likely done hiking, whether we are right or wrong hardly matters. What does matter is that rates are as high as they have been in a generation across the entire yield curve, and we think client should focus on the longer term yields on offer, rather than focusing on whether the Fed will raise rates by another +25 bps or so.
As a reminder, the Fed began its aggressive rate hiking campaign in a generation last March. In the past 18 months, the Fed funds rate has climbed from zero to a range of 5.25% to 5.50%. The most recent hike was in July, and the Fed has kept rates steady at the last two meetings.
As of this writing, markets are pricing in a 90% chance of steady rates at the December FOMC. If that comes to pass, the Fed will have been on hold for three consecutive meetings, with the last rate hike coming in July 2023. We think it becomes much harder for the Fed to restart rate hikes after such an extended pause, unless there is clear evidence that inflation “genie” has not been put back in the bottle.
Inflation Genie: Mostly Back In the Bottle
The reason for the Fed’s aggressiveness is the rise of inflation. Headline CPI rose to a peak of 9.1% in June 2022 following pandemic supply chain challenges and higher oil prices following the war in Ukraine. Since then, the Fed’s top priority has been to get that number back down towards its policy target of 2%. We note that the Fed actually targets core PCE, not headline CPI. The peak for core PCE was 5.5% in mid-2022; still too high, but not as far away from target as widely believed. Since last summer, inflation metrics have continued to fall. For September, both headline CPI and core PCE were 3.7% on a year-over-year basis.
Although we’re not all the way back to 2% target, we are much closer and the trend remains in the right direction. The Fed has not committed to a particular date for achieving its 2% inflation target, and we think that is deliberate. The Summary of Economic Projections shows that FOMC members expect core PCE to approach 2% only in 2025, nearly two years from now. The Fed is attempting to pull off a “soft landing” in which inflation retreats back to the target range, but without causing a recession. If inflation does not fall as expected, we can’t rule out that there could be one more rate hike in the cards.
It Doesn’t Matter
Nevertheless, we would argue that whether the Fed is totally done hiking rates is not all that important. Rather, we think the question should be: Are rates going to rise much higher from here? Is there a high probability that the Fed has long way still to go? With the Fed funds rate at 5.5%, is there a reasonable chance we could see the Fed funds rate at 6%? 7%? 8%?
In our view, the answer is clearly No. The focus over whether the Fed might do one more +25 bps hike or not, or even two more, is less relevant that the broader takeaway: the Fed is now very close to ending this hiking cycle. We have already begun to see inflation falling, labor markets cooling, and the overall economic outlook coming off the boil.
Importantly, we believe investors should take heed of the what the yield curve is saying. The yield curve has been inverted since mid-2022, and it remains inverted across multiple metrics: 3M vs. 1Y, 2Y vs. 10Y, 3M vs 18 forward 3M, which is the Fed’s favorite. We emphasize the inversion itself indicates markets think interest rates will be lower in the future. Because of bond math, a longer-term interest rate can be thought of as a series of short-term rates, that are reinvested in the future, plus a “term premium” for the uncertainty of rates will be at the reinvestment points. The fact that the yield curve remains inverted tells you that rates are likely to decline in the future, otherwise bondholders would demand higher yields for holding longer bonds.
Is Cash a Trap?
What does all this mean for investing right now? We have seen various pundits arguing that cash is essentially a “trap” at current levels. On this point, we heartily agree.
A historical analysis by JPMorgan reviewed subsequent returns for Treasuries and all bonds (represented by the U.S. Aggregate bond index) over two year periods following the yield curve inversions since 1981.
In every instance, Treasuries and bonds outperformed cash returns in the following two years. The reason is simple: as rates fall, cash and cash equivalents, such as money market funds, reprice downward immediately. In sum, that 5% rate clients see today on their T-bill or money fund is basically an illusion. In two years from now, rates in the U.S. are likely to be lower. Clients who didn’t extend duration may have lost the chance to lock in higher rates for longer. We advocate that clients with an appropriate investment horizon add duration to their fixed income portfolios now, in order to avoid falling into the “cash trap.”
Source: https://filmschoolrejects.com/its-a-trap-meme/
Definitions, sources, and disclaimers
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Insured By Governmental Agencies | Member FINRA/SIPC, Registered Investment Advisor
SPANISH
La renta fija en la mira: Evitando la trampa del efectivo
La pregunta más frecuente que nos hacen estos días es: “¿Ha terminado la Reserva Federal de subir las tasas?” Si bien somos de la opinión de que es probable que la Reserva Federal haya terminado con las subidas, poco importa si estamos en lo cierto o no. Lo que sí importa es que las tasas están tan altas como lo han estado en una generación en toda la curva de rendimientos, y creemos que el cliente debe centrarse en los rendimientos a largo plazo que se ofrecen, en lugar de centrarse en si la Fed subirá las tasas +25 puntos básicos más o menos.
Recordemos que la Fed inició su agresiva campaña de subidas de tasas el pasado mes de marzo. En los últimos 18 meses, la tasa de los fondos de la Fed ha subido de cero a un rango de entre el 5.25% y el 5.50%. La subida más reciente se produjo en julio, y la Fed ha mantenido las tasas estables en las dos últimas reuniones.
Al momento de escribir este artículo, los mercados están valorando una probabilidad de 90% de que las tasas se mantengan estables en la reunión del FOMC de diciembre. Si esto ocurre, la Fed habrá mantenido las tasas durante tres reuniones consecutivas, siendo la última subida en julio de 2023. Creemos que es mucho más difícil que la Fed reinicie las subidas de tasas tras una pausa tan prolongada, a menos que haya pruebas claras de que el “genio” de la inflación no ha vuelto a meterse en la botella.
El genio de la inflación: Mayormente de regreso a la botella
La razón de la agresividad de la Reserva Federal es el aumento de la inflación. El IPC general subió a un máximo del 9.1% en junio de 2022 tras los problemas de la cadena de suministro por la pandemia y la subida de los precios del petróleo por la guerra de Ucrania. Desde entonces, la principal prioridad de la Fed ha sido reducir ese número hacia su objetivo del 2%. Observamos que la Fed en realidad apunta al PCE central, no al IPC principal. El pico para el PCE central fue del 5.5% a mediados de 2022; todavía demasiado alto, pero no tan lejos del objetivo como se cree ampliamente. Desde el verano pasado, las métricas de inflación han seguido cayendo. Para septiembre, tanto el IPC general como el PCE principal fueron del 3.7% año tras año.
Aunque no hemos vuelto al objetivo del 2%, estamos mucho más cerca y la tendencia sigue en la dirección correcta. La Reserva Federal no se ha comprometido con una fecha concreta para alcanzar su objetivo de inflación del 2% y creemos que es deliberado. El Resumen de Proyecciones Económicas muestra que los miembros del FOMC esperan que el PCE básico se acerque al 2% en 2025, dentro de casi dos años. La Reserva Federal está intentando lograr un “aterrizaje suave” en el que la inflación retroceda al rango objetivo, pero sin causar una recesión. Si la inflación no cae como se espera, no podemos descartar que pueda haber otra subida de tasas en el horizonte.
No es tan importante
Sin embargo, diríamos que no es tan importante que la Reserva Federal haya terminado por completo con subir las tasas. Más bien, creemos que la pregunta debería ser: ¿las tasas van a subir mucho más a partir de ahora? ¿Existe una alta probabilidad de que a la Reserva Federal todavía le quede mucho camino por recorrer? Con la tasa de los fondos federales a 5.5%, ¿existe una posibilidad razonable de que podamos ver la tasa de los fondos federales en el 6%? 7%? 8%?
En nuestra vista, la respuesta es claramente no. El enfoque sobre si la Fed pudiera realizar una subida más de +25 bps o no, o incluso dos más, es menos relevante que la conclusión más amplia: la Fed está ahora muy cerca de terminar este ciclo de subidas. Ya hemos empezado a ver la caída de la inflación, el enfriamiento de los mercados laborales y el deterioro de las perspectivas económicas generales.
Es importante destacar que creemos que los inversores deberían prestar atención a lo que dice la curva de rendimiento. La curva de rendimiento se ha invertido desde mediados de 2022 y permanece invertida en múltiples métricas: 3 meses frente a 1 año, 2 años frente a 10 años, 3 meses frente a 3 meses a 18 años, que es el favorito de la Reserva Federal. Destacamos que la inversión en sí misma indica que los mercados piensan que las tasas de interés serán más bajas en el futuro. Debido a la matemática de los bonos, un tipo de interés a largo plazo puede considerarse como una serie de tasas a corto plazo, que se reinvierten en el futuro, más una “prima de plazo” por la incertidumbre de las tasas en los puntos de reinversión. El hecho de que la curva de rendimiento permanezca invertida dice que es probable que las tasas disminuyan en el futuro, de lo contrario, los tenedores de bonos exigirían mayores rendimientos para mantener bonos más largos.
¿Es el efectivo una trampa?
¿Qué significa todo esto para invertir ahora? Hemos visto a varios expertos argumentar que el efectivo es esencialmente una “trampa” en los niveles actuales. En este punto estamos totalmente de acuerdo. Un análisis histórico realizado por JPMorgan revisó los rendimientos posteriores de los bonos del Tesoro y todos los bonos (representados por el índice de bonos agregados de EE. UU.) durante períodos de dos años después de las inversiones de la curva de rendimiento desde 1981.
En todos los casos, los bonos del Tesoro y los bonos superaron los rendimientos del efectivo en los dos años siguientes. La razón es simple: a medida que las tasas caen, el efectivo y sus equivalentes, como los fondos del mercado monetario, bajan inmediatamente su precio. En resumen, esa tasa del 5% que los clientes ven hoy en sus letras del tesoro o fondo monetario es básicamente una ilusión. Dentro de dos años, es probable que las tasas en Estados Unidos sean más bajas. Es posible que los clientes que no ampliaron la duración hayan perdido la oportunidad de fijar tarifas más altas durante más tiempo. Abogamos por que los clientes con un horizonte de inversión adecuado añadan ahora duración a sus carteras de renta fija, para evitar caer en la “trampa del efectivo”.
Fuente: https://filmschoolrejects.com/its-a-trap-meme/
Definiciones, fuentes y exenciones de responsabilidad
Definiciones:
- El Índice de Precios al Consumidor (IPC): Es una medida del cambio promedio a lo largo del tiempo en los precios pagados por los consumidores urbanos por una canasta de mercado de bienes y servicios de consumo. Los índices están disponibles para EE. UU. y varias áreas geográficas. También están disponibles datos de precios promedio para servicios públicos seleccionados, combustible para automóviles y alimentos. Fuente: Oficina de Estadísticas Laborales (BLS).
- Comité Federal de Mercado Abierto (FOMC): Responsable de implementar Operaciones de Mercado Abierto (OMO), la compra y venta de valores en el mercado abierto por parte de un banco central, que son una herramienta clave utilizada por la Reserva Federal de EE. UU. en la implementación de la política monetaria. Fuente: Reserva Federal.
- Tasa de fondos federales: es la tasa de interés a la que las instituciones depositarias intercambian fondos federales (saldos mantenidos en los bancos de la Reserva Federal) entre sí a un día. Cuando una institución depositaria tiene saldos excedentes en su cuenta de reserva, presta a otros bancos que necesitan saldos mayores. En términos más simples, un banco con exceso de efectivo, lo que a menudo se denomina liquidez, prestará a otro banco que necesite aumentar rápidamente su liquidez. Fuente: Banco de la Reserva Federal de St. Louis.
- El índice de precios PCE “básico”: se define como los precios de los gastos de consumo personal (PCE), excluyendo los precios de los alimentos y la energía. El índice de precios PCE básico mide los precios pagados por los consumidores por bienes y servicios sin que la volatilidad causada por los movimientos de los precios de los alimentos y la energía revele las tendencias inflacionarias subyacentes. Fuente: Oficina de Análisis Económico (BEA).
Fuentes: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Fuente: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Divulgaciones importantes:
Las opiniones contenidas en este documento no deben tomarse como consejo o recomendación para comprar o vender ninguna inversión en ninguna jurisdicción, ni constituyen un compromiso de Amerant Investments, Inc. o cualquiera de sus afiliados para participar en cualquiera de las transacciones mencionadas en este documento. Cualquier pronóstico, cifra, opinión o técnica y estrategia de inversión expuesta tiene fines informativos únicamente, se basa en ciertas suposiciones y condiciones actuales del mercado y está sujeto a cambios sin previo aviso. Toda la información presentada en este documento se considera precisa en el momento de su producción. Este material no contiene información suficiente para respaldar una decisión de inversión y usted no debe confiar en él para evaluar los méritos de invertir en valores o productos. Además, los usuarios deben realizar una evaluación independiente de las implicaciones legales, regulatorias, impositivas, crediticias y contables y determinar, junto con sus propios asesores profesionales, si alguna inversión mencionada en este documento se considera adecuada para sus objetivos personales. Los inversores deben asegurarse de obtener toda la información relevante disponible antes de realizar cualquier inversión. Cabe señalar que la inversión implica riesgos, el valor de las inversiones y los ingresos derivados de ellas pueden fluctuar de acuerdo con las condiciones del mercado y los acuerdos fiscales y es posible que los inversores no recuperen el importe total invertido. Tanto el desempeño pasado como los rendimientos no son indicadores confiables de los resultados actuales y futuros.
No asegurado por la FDIC l No se trata de un depósito bancario l Puede perder valor l No asegurado por agencias gubernamentales l Miembro FINRA/SIPC, Asesor de inversiones registrado
