Christian Mueller-Glissmann, managing director of Portfolio and asset allocation at Goldman Sachs Group, has a simple formula for his clients. The shock inflation figures will ensure that Wall Street’s bad year will get worse.
According to Glissman, the person behind the rate curve, Jerome Powell, is under pressure to hike the inflation-linked interest rates to cool down the inflationary business cycle. This move is going to further damage cross-asset portfolios.
All these developments suggest that barring the US dollar, everything else is set to tumble even more as the Federal Reserve is committed to increasing real yields. The 10-year bonds benchmark was surpassed briefly on Tuesday by 1%. This level was last seen in 2018, and now it looks set to tighten economic growth.
The central bank is happy that the bonds are finally responding to its hawkish calls. However, it is a different story for the investors considering the investment stratus ranged from rate-sensitive gold, cryptos, and tech stocks.
Data from Labour Department showed consumer price index increased more than the estimated 0.1 % in August after it remained unchanged in July. Taking the cue, money managers exited tech stocks and long-term corporate bonds. The Nasdaq 100 tumbled and suffered its worst fall since March 2020.
It is now a virtual lock for a 75-basis point interest rate hike by the Fed in next week’s policy meeting, as per reports. The economists at Goldman Sachs have now revised their December rate hike to 50 basis points from the earlier 25 basis points and a 75-percentage hike in September.
Real Yield From Bonds
The relationship between real rates and stocks is established now, and the former translates to lower price equity multiples keeping other things the same. Speculative assets such as stock trading look less appealing as they have lower opportunity costs when holding them compared to the real returns of Treasury bonds or cash positions.
The real rates have already started the Federal reserve bidding by tempering the boom in housing and discouraging corporates and consumers who are already overstretched from taking fresh borrowings. This time it will be very different from 2018, with the central bank quietly cheering the new high levels. In 2018, when the real rates were high, the surge discouraged the policymakers from abandoning their tightening measures. That was a part of Powell’s much-vaunted “pivot” against the quantitative “autopilot” tightening. The rate hikes were stopped shortly after that. Future investors are less cheerful now.
Richard Flynn, Managing Director of UK-based financial service firm Charles Schwab, said after the inflation report that high inflation and interest rates risk economic growth and push major economies, including the US, into recession. As of now, corporate earnings remain robust. However, investors will closely follow the second half of the fiscal performance of corporates.
