PARIS, January 26 (Reuters) – The Federal Reserve (Fed) could achieve the feat of bringing inflation back to its target without causing unemployment to rebound, but to do so it will have to quickly lower its rates, according to Degroof Petercam, the group also favors an opportunistic allocation to bonds, with returns on equity markets remaining less attractive.
“’Immaculate disinflation’ is a real possibility, while recessive signals in the United States appear weaker than expected,” summarized Jérôme van der Bruggen, head of investment at the Belgian private bank, at opportunity for a press conference.
“For this scenario to play out – which would be unheard of in the history of monetary tightening cycles – the Fed must quickly lower rates,” added the official.
In fact, underlines Degroof Petercam, inflation is now essentially pushed upwards by housing prices, a component which takes time to adjust – its method of calculation integrates rental market prices, which reflect with delay the increases in house prices – but which is expected to start to decline in the coming months.
The contribution of other expenditure items (services, manufactured goods, energy) to price dynamics has become significantly weaker, even negative, highlights Degroof Petercam.
The labor market is also showing first signs of stabilization, with new job offers showing a decline.
“The Fed wants to bring inflation back to its target, but not at the cost of an increase in unemployment,” summarizes Jérôme van der Bruggen. “For this to happen, easing must take place before unemployment begins to rise.”
Two other factors argue for a rapid drop in rates, according to Degroof Petercam. On the one hand, the US elections will prompt the central bank to refrain from changing its monetary policy too soon before the election – historically, the central bank becomes wait-and-see six months before the election.
Furthermore, the rise in the dollar is weighing on global financing conditions, an element already mentioned by the Fed during its last rate increases in 2018-2019 as a factor that could encourage it to moderate, recalls Degroof Petercam.
In the euro zone, the European Central Bank (ECB) will not be able to relax its policy before that of the Fed otherwise the euro will be sanctioned, estimates the management company.
“The ECB will lower its rates shortly after the Fed, by the end of the first half of the year. Only a significant recession could convince it to relax its monetary policy sooner,” concludes Jérôme van der Bruggen.
OPPORTUNITIES
However, these rate cuts do not justify further exposure to equities, the bank remaining “neutral” on the asset class, which represents 55% of its allocation.
“Rate cuts are already well integrated into the prices of stocks and sovereigns, while there is the risk of a slowdown in the American economy and a slight recession in the euro zone,” underlines Roland Toulet Morlanne, manager at Degroof Petercam.
The consensus, which generally expects profit growth of 10% this year, seems optimistic, especially since turnover growth is expected to be lower.
“In a context of wage increases, it seems difficult for margins to improve,” notes the manager. A disappointment in profits could lead to a readjustment of prices, he believes.
Degroof Petercam does not, however, rule out returning to equities in the middle of the year, as valuations remain attractive, particularly in the euro zone, and the risk premium is increasing.
The yields on quality and high-yield corporate bonds, for which spreads reach 100 and 400 basis points respectively, nevertheless justify preferring credit, in which the group is overweighted.
“We favor opportunistic exposure to credit,” explains Roland Toulet Morlanne. The group remains cautious on high yield, the average maturity oscillating between 2 and 3 years, compared to 5 to 6 years for quality credit.
Conversely, sovereigns are underweighted, with high prices not sufficiently taking into account episodes of stress that could arise from large volumes of debt, according to the bank. (Written by Corentin Chappron, edited by Blandine Hénault)
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