Markets need not fear interest rate hikes.
Abraham George Macro Musings
What is unique about this interest rate cycle is that there are signs of deflationary forces ending globally as central banks are acting in unison in ending the coordinated easy money policies.
In all these matters, the Fed takes the lead and others follow. The Fed was already giving signals from last November but just after the Fed meeting in December, the Bank of England raised rates for the first time since the pandemic.
On Feb 1, the Reserve Bank of Australia (RBA) ended its QE program and set expectations for a potential rate hike for the year.
On 3 Feb, the Bank of England (BoE) raised rates again by a quarter-point with four of the nine voting members wanting a fifty basis point hike.
Even the ECB which had not committed to anything so far is slowly changing its track. Lagarde who flip-flops on most matters signaled that a rate hike could happen this year.
The Bank of Japan (BoJ) which has been dealing with three decades of broad deflation, and has had interest rates near zero for nearly a quarter of a century, is debating a post-pandemic rate hike.
Why is this sudden change of heart? All the major central bankers know they are far behind in dealing with inflation from historical precedence. US, UK, Europe, Canada, Japan, and Australia are starting from zero interest rates. Global inflation is on and it is in its very early stages. The good thing is that overall central banks have done a good job in engineering the markets forward.
At least in the context of the US, job growth is twice as strong as it was in December 2015, when the Fed started to normalize rates after the GFC. Even the unemployment rate is lower by 110 basis points than the 2015 reference point with inflation much higher than the two percent threshold.
How far can the US go on this upcycle with interest rates when they actually start hiking? I think four hikes starting from March this year are very much discounted in current equity prices. There are discussions about even five to seven hikes this year. The raising of interest rates does not kill a bull market nor does the bull market die of old age. I had discussed this in my previous articles.
The fear of interest rate hikes put some brakes on the markets already. There could be a severe downturn in markets but think that is at least four months to six months ahead. The coming few months should be extremely good for the markets. At some point during this time, we should see a climatic top where the informed will look to stay out of the markets.
My hunch is that the Fed will not overplay the interest rate card too much as the government will have an eye on the midterm elections in November this year.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.