There are unlikely to be rate cuts by central banks this year, according to JP Morgan Asset Management’s strategist, Kerry Craig.
The federal fund rate in the US is currently 4.8 per cent, up from 0.33 per cent a year ago, while inflation was 4.9 per cent and there was speculation the Federal Reserve could start to cut by the end of 2023.
The CME FedWatch tool was priced in a 43.7 per cent chance of a rate cut in July, 80.1 per cent chance of a rate cut in September, and a 97 per cent chance by the end of the year.
Speaking to Money Management, executive director and global market strategist Craig said: “I’m pushing back on the market pricing of the 50 to 75 bps cut being priced by year-end or even the notion that the Reserve Bank of Australia could cut rates by 2023.
“There is a chance that the Fed could cut in December if the economy really deteriorated.”
He also speculated on what other actions central banks, such as the Reserve Bank (RBA) would take if the Federal Reserve opted to pause or cut its rates.
“Historically, if the Fed pauses, that doesn’t necessarily mean that other central banks will do so; they can continue to hike even if the Fed isn’t doing so. But once the Fed starts to cut, then others tend to do the same.”
This meant that if the Federal Reserve started to cut rates in December 2023 or early 2024, then he would anticipate other central banks to start cutting rates in 2024.
If this did play out, then investors would need to prepare their portfolios for a different type of market environment of falling rates rather than rising ones. A rate cut would be an indication that inflation was also returning closer to the target of 2 to 3 per cent.
“Investors should be cautious given the uncertain market and macro outlook, but keep in the back of their mind that inflation will head back to targets in 2024 and rates will be cut, creating a better environment for risks, so be ready for the next cycle.”
“The RBA doesn’t need to hike anymore. If inflation doesn’t come down quick enough, just let it happen without squeezing the economy too hard.”
The $212 billion Silicon Valley Bank collapsed in March, followed by Signature Bank a few days later and First Republic in late April, which was sold to JPMorgan Chase. Last week, there was a concern for California-based PacWest after shares fell more than 50 per cent.
“We have had three big bank failures, and more will probably fail. There’s been an earthquake and there will absolutely be aftershocks,” Craig said.
“It does raise the risks of recession and the depth of that recession.”
The US was at the highest risk of a recession while the eurozone was the least likely, with Australia sitting in between the two regions, he said.
Asked whether the US would intervene to prevent future failures, he said it would depend on a case-by-case basis but that he was encouraged by the actions taken by the government to bail them out so far.
He added the bank failures were having a knock-on effect on the property market; Silicon Valley Bank had been the country’s 16th largest lender.
“Real estate is looking vulnerable; it’s the small banks which are providing lots of lending for them. There is this ripple effect through the real estate market from bank failures,” Craig said.
