While US key rates may fall this year, the biggest risks are inflation, according to Karsten Junius of J.Safra Sarasin, who suggests overweighting stocks.
Uncertainties over American interest rates, illustrated by the rise in yields on 10-year Treasury bonds, are leading to a consolidation movement in equities. Karsten Junius, chief economist of the J.Safra Sarasin group, answers questions from Allnews:
How many key rate cuts should the Fed make in 2024?
We expect two interest rate cuts from the Fed by the end of 2024. The scenario of a rate cut in September is weakened with the publication of each economic indicator testifying to the robustness of the economy.
Everything suggests that the second quarter will remain robust. American economic growth remains above growth potential, even if certain signals point to an economic weakening, under the effect of current restrictive monetary conditions. The granting of credit should gradually reduce. But the tax incentives in favor of investment prevent a more pronounced slowdown in the economy so that the labor market is still developing very favorably. The Fed’s concerns about inflation remain justified.
At the start of the year, three successive inflation reports exceeded expectations, the last one was more favorable, but the Fed needs to see 2-3 positive reports before it can cut rates. This means that in May, June and July the underlying inflation statistics (excluding energy and food) should be compatible with the Fed’s objectives so that it can act in September. Otherwise, he will have to wait for the presidential elections.
Are you worried about weakening growth or persistent inflation?
For now, the biggest risks relate to inflation.
In your asset allocation, calls for profit-taking in stocks are increasing. What do you currently favor?
We continue to overweight equities. Our concerns relate rather to the concentration of the increase in an ever-smaller number of stocks. I am of course thinking of Nvidia, which is benefiting from an incredible increase in its profits. There are always fewer winners. It is true that the quarterly results season turned out to be positive.
“The Fed needs to see 2-3 positive reports before it can cut rates.”
The favorable trend in quarterly earnings shows that the rise in stocks is not fueled solely by speculation. This is one of the reasons for maintaining our positive approach to the markets. The economy continues to grow and so do corporate profits. With this scenario, the investor should remain invested.
Should we leave the Magnificent 7?
We would not exit the market, or indeed technology stocks, because we are positive in the medium term, including with regard to this sector. The choice of individual securities is left to the portfolio manager.
In terms of currencies, the franc is weakening slowly but surely. When will it start to rise again?
The Swiss franc is trading today at its fair value, at 0.9850 euros per franc. It corresponds to its real weighted value of commercial exchanges and its average over 10 years. I think the franc will struggle to appreciate in the coming months.
The markets are doubtful that the SNB will cut rates again in June, but I am convinced that it will take the step and reduce its key rate. Monetary policy remains restrictive and the economy is only growing below potential.
My scenario for a decline in the franc is based on two factors: the new reduction in interest rates by the SNB and because a cyclical recovery in the euro zone historically corresponds to an increase in the euro compared to the franc.
The franc could then strengthen, if the SNB, after the September decision, did not undertake an additional rate cut, while the ECB, and the Fed for that matter, would reduce them further. The rate differential would then argue in favor of the franc. This is why I expect the franc to rise in the last quarter of 2024.
Which currency is not at its fair value?
The yen is weakly valued. This is the most obvious case.
The yield on 10-year Treasury Bonds is very volatile. It rose to 4.57% on Wednesday. What’s the next step?
US bond yields are expected to fall by the end of the year, but I understand the market’s strong hesitations. The fluctuations reflect protocol from the Fed’s last session which revealed that several members could not rule out a rate hike. Fed members themselves cannot agree on the future direction of key rates. This is a real Source of volatility. The situation is quite extraordinary.
“The favorable trend in quarterly earnings shows that the rise in stocks is not fueled solely by speculation.”
There is consensus on the prospect of a soft landing, but it is based on the idea that the level of interest rates has a restrictive effect. If we doubt this, we could move on to the idea of a boom or a “no landing”.
I understand that the level of rates is not at a neutral level if we also add the current budgetary stimulus which supports the economy.
The fact remains that the rate level is at its highest in 20 years and the dollar is rather strong. The slowdown in job postings should indicate that a slowdown in momentum is underway.
The US presidential elections are at the center of the political agenda this fall. Why do the markets seem to estimate that the impact on major economic and financial trends will be modest?
Uncertainty is still very high. We are still so far from this deadline that the markets are hesitant to make a decision. Joe Biden is weakening Donald Trump’s candidacy by introducing similar proposals into his program, for example a very expansive budgetary policy, or massive customs duties on Chinese products.
For financial markets, this should translate into higher interest rates. Both candidates have an inflationary policy. Whether through increased fiscal spending, like Biden, or tax cuts, like Trump, the chosen direction is one of higher prices and short-term growth. Both programs lead to higher interest rates. In this sense, the level of bond yields perhaps indicates a form of anticipation of future political choices.
Is this positive for gold?
Gold is rising partly on reduced confidence in the prospect of economic stability. The outlook is catastrophic for the American public debt. The CBO forecasts budget deficits of more than 5% over the next two years. Neither candidate provides an answer to this challenge. This makes gold more attractive.
