Topic Tags: Interest Rates

Survey Says…

During its September meeting, the Federal Open Market Committee (FOMC) opted to keep its policy rate unchanged — within a range of 5.25% to 5.50%. In doing so, policymakers signaled a commitment to keeping rates elevated over the coming months in order to achieve the central bank’s long-run inflation target of 2.0%. Fed officials appear to be taking a deliberate and cautious approach to recent policy now that interest rates have entered firmly restrictive territory and could potentially hinder growth. The Fed also noted the “lags with which monetary policy affects economic activity” in its September FOMC statement. These lagged effects would likely be an argument in favor of slowing the pace of tightening since the impact of previous rate increases may not yet be reflected in current economic data. To that point, the most recent Summary of Economic Projections, which in part serves as an assessment of FOMC participants as it relates to appropriate monetary policy, indicates that a majority of officials favor one more rate hike in early November before policy loosening in 2024 and beyond.

The September Summary of Economic Projections yielded additional interesting pieces of information related to how policymakers are viewing the current and future macroeconomic landscape. For instance, the median response of FOMC participants for 2023 GDP growth was 2.1%, which represents a significant increase from the 1.0% figure reflected in the June survey. The median estimate of long-run GDP growth in the September survey was 1.8%. Additionally, the September survey suggests that the median FOMC official expects the unemployment rate to tick up to 4.1% in 2024 before moderating to 4.0% over the longer term. Finally, median estimates for PCE inflation, which is the preferred measure of the Fed, sat between 2.0–2.5% over the coming years.

While it is encouraging to see inflation expectations moderating without substantial decreases in future growth or material increases in the projected unemployment rate, the Fed still faces obstacles related to obtaining these desired outcomes, including a potential government shutdown. Marquette will continue to monitor the actions of the central bank and keep clients informed accordingly.

2023 Investment Symposium

Watch the flash talks from Marquette’s 2023 Investment Symposium livestream on September 15 in the player below — use the upper-right list icon to access a specific presentation.

 

Please feel free to reach out to any of the presenters should you have any questions.

Brazil Eases Into the Fall

On August 2, Brazil’s central bank cut its benchmark interest rate by 50 basis points, from 13.75% to 13.25%. This marks the country’s first rate cut in over three years and is in stark contrast to moves made by Brazilian policymakers in recent time. To that point, between February 2021 and July 2022, Brazil increased its key rate from 2.00% to 13.75%, representing the most aggressive monetary tightening by any central bank during this period. The August cut was made possible by a moderate domestic inflation rate of 3.2%, which sits well below the country’s post-pandemic peak of 12.1% exhibited in April of last year. Brazilian authorities have indicated that additional cuts are likely in the near future, thanks in large part to an improving consumer price outlook and longer-term inflation expectations that continue to fall. These dynamics place the country ahead of much of the globe when it comes to the cycle of interest rates, as many nations, particularly those in the developed world, continue to fight elevated inflation via restrictive monetary policy. Alternatively, other Latin American countries like Chile, Mexico, and Peru have either lowered rates in recent time or are expected to embark on easing campaigns within the coming months.

As it relates to performance, Brazilian equities have been a bright spot within the emerging markets space in 2023 and have significantly outpaced the MSCI EM index on a year-to-date basis through the end of July (22.6% vs. 11.4%). Expectations of a shift in monetary policy which has now come to fruition, coupled with better-than-expected fiscal and political outlooks, have boosted sentiment and helped fuel these strong returns. Should monetary conditions continue to ease, Brazil and its Latin American peers may continue to provide an attractive opportunity set for investors going forward.

Revisiting the Banking Industry

Though the regional banking turmoil that surfaced in March has largely faded into the background, Moody’s brought focus back to the sector last week when the rating agency downgraded 10 regional banks one notch (all remain investment grade). Moody’s also placed six larger lenders under review for a potential downgrade and cut the outlook for another 11 banks from stable to negative, indicating their ratings could be downgraded in the future. The rating agency cited interest rate and asset-liability management risks, as well as growing profitability pressures and expectations for a mild U.S. recession in early 2024 as reasons for these changes. Similar to Fitch’s downgrade of U.S. credit the week prior, the timing of these moves is being critiqued as deposit flows have generally stabilized since March, the Federal Reserve is likely at or near peak rates, and a soft landing appears increasingly likely.

Bank stocks pulled back modestly on the news, after notably outperforming the broader market in July. From here, a number of moving pieces remain at play. These include sensitivity of the banking industry to commercial real estate issues, tighter lending standards, and potentially higher-for-longer rates, though it is important to note that overall credit quality remains strong and the banking system remains well capitalized. Though the Moody’s downgrades may have little practical impact, they do serve as a reminder — especially after the strong performance of equities since the start of the year — that a number of uncertainties remain and, therefore, market volatility along with elevated dispersion could likely continue for the remainder of 2023.

Print PDF > Revisiting the Banking Industry

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Honey, I Shrunk the Money Supply

M2 money supply, as defined by the Federal Reserve, includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers’ checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. M2 rapidly increased throughout 2020 and 2021 amid COVID-related monetary stimulus, to a peak of almost $22 trillion in July 2022. As the economy reopened and inflation accelerated — with headline CPI hitting a peak of 9% year-over-year in June 2022 — the Fed responded with a series of rate hikes and quantitative tightening measures. The result has been a rapid decrease in the money supply, with M2 down 3.6% year-over-year as of June 2023. The effects of the swift reduction in M2 have likely only begun to be felt, but a continued contraction — facilitated by higher-for-longer rates and continued quantitative tightening — could help cool inflation further and contribute to a soft landing for the economy.

Print PDF > Honey, I Shrunk the Money Supply

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Observations from Across the Pond

Marquette regularly sends a senior member of our research team abroad as part of ongoing manager sourcing and due diligence efforts. These trips include update meetings with investment managers with whom Marquette has existing relationships as well as on-site visits with potential new manager recommendations. The cadence of these trips was severely impacted by the COVID-19 pandemic, but with international travel now almost back to normal, Marquette sent Senior Research Analyst Evan Frazier on a whirlwind tour of Europe earlier this summer. Over the course of almost a week, Evan met with eight investment management firms across three cities.

In this newsletter, Evan shares the perspectives, as well as more anecdotal information, he gained while on the ground in Europe, including insights on the region’s economy, the corporate landscape, and the unique set of opportunities and challenges currently facing international markets.

Read > Observations from Across the Pond

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Fitch Downgrades U.S. Credit

Fitch Ratings unexpectedly downgraded the U.S. government’s credit rating one notch from AAA to AA+ on August 1, 2023. This is only the second downgrade in history, after S&P Global Ratings, then Standard & Poor’s, made the same adjustment shortly after the 2011 debt ceiling crisis; S&P has maintained the AA+ rating since. Moody’s — the third major U.S. rating agency — still has the U.S. at its highest Aaa rating. Fitch noted the downgrade reflects expected fiscal deterioration over the next three years, the country’s high and growing debt burden, and an erosion in governance over the last several years, marked by bipartisan standoffs and last-minute resolutions. The downgrade and timing have drawn criticism from the Biden administration and economists, citing economic strength and the minuscule risk of the U.S. actually missing any debt payments.

While in practice the downgrade will likely have minimal impact, with the U.S. government broadly considered one of the safest borrowers, markets are reacting. Treasuries initially rallied on the news, anticipating the same flight to quality seen in 2011, though that sentiment reversed this morning, with yields at one point breaching a key resistance level of 4.1% — a level last seen in November 2022. Also likely contributing to the move today is the Treasury Department’s announced plans to sell a higher-than-expected amount of longer-dated securities next week, as it works to replenish the Treasury General Account (reference Marquette’s recent newsletter for additional context). The U.S. dollar initially dipped on the news but has since rallied and is up on the day amid higher yields. U.S. equities, after a steep run, are down modestly today, with growth equities leading the group lower.

Print PDF > Fitch Downgrades U.S. Credit

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Emerging From the Depths: An Overview of the Emerging Market Debt Opportunity Set

Emerging market debt (EMD) has earned a checkered reputation at best from institutional investors. The asset class is large, complex, and comes with unique risks that can lead to “throwing the baby out with the bath water” when things go wrong. 2022 was a challenging year for investors across asset classes, and emerging markets headlines ranging from the meltdown in Chinese property developers to Russia’s invasion of Ukraine only complicated the investment case for EMD. That said, historically the asset class has tended to rebound strongly from drawdown events, and that has so far been the case this year.

This newsletter revisits the dynamics of emerging markets debt, reviews 2022 performance, and discusses the investment opportunity from here.

Read > Emerging From the Depths: An Overview of the Emerging Market Debt Opportunity Set

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Halftime Adjustments

For anyone who regularly reads these letters, recall the market preview edition opined on the outlook for asset classes in 2023, particularly the likelihood of each delivering positive returns for the upcoming year. Given that we are halfway through the year, we would like to use this letter to make “halftime adjustments” to our outlook; with NFL training camps set to open later this month, we couldn’t resist the urge to borrow a football term. We hope this is a quick beach read as you enjoy your summer vacations and prepare for the second half of the year.

This edition re-assesses the outlook for fixed income, equities, and real estate for the second half of 2023.

Read > Halftime Adjustments

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2023 Halftime Market Insights Video

This video is a recording of a live webinar held July 19 by Marquette’s research team, featuring live, in-depth analysis of the second quarter and themes we’ll be monitoring in the second half of the year.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

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For more information, questions, or feedback, please send us an email.