S&P/ASX 200 Index (ASX: XJO) shares are enjoying a solid rebound today following yesterday’s sell-off.
In afternoon trade the ASX 200 is up 0.6%.
Tech shares are broadly outperforming, as witnessed by the 1.5% gains posted by the S&P/ASX All Technology Index (ASX: XTX), which contains some smaller companies outside of the ASX 200.
Today’s strong performance follows a positive day of trading in US markets yesterday (overnight Aussie time). The day saw the S&P 500 Index (SP: .INX) closing up 1.7% and the tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) gaining 2.1%.
And those gains, in turn, were fuelled by investors increasingly betting that the US Federal Reserve will ease off its hawkish tightening pace sooner than feared.
Why might the Fed ease its tightening policies?
A growing number of analysts believe the Fed, the world’s most watched central bank, may take a step back from its rapid rate hike path following last week’s collapse of SVB Financial Group (NASDAQ: SIVB).
The logic here is that after ramping up interest rates at a record pace from previously record lows, SVB’s collapse is indicative of wider stress amongst financial institutions. And if the Fed wants to avoid pushing other banks over the edge, it may need to hold fire on further rate increases.
As you can with the ASX 200 movements today, any potential easing by the Fed would offer up some healthy tailwinds for further gains.
On the other side of that coin, however, the latest inflation figures out of the US showed an increase in monthly consumer prices.
Data released by the Bureau of Labor Statistics showed February’s consumer price index (CPI) increased 0.4% in February and was up 6% over the past full year. That could force the Fed’s hand in delivering another big rate hike on 22 March.
So, where does that leave us?
What can ASX 200 investors expect from the Fed next week?
For some greater insight into what ASX 200 investors can expect next Thursday on the heels of the Fed’s announcement, we turn to the experts (courtesy of Bloomberg).
Tom Essaye, a former Merrill Lynch trader, said a 0.25% hike still looks to be on the cards while earlier expectations of a 0.50% rate hike are unlikely:
Given the bank troubles, this [inflation] report isn’t bad enough to put 50 bps back on the table, but if the Fed wants to maintain credibility on inflation, then this report says they have to hike again next week and not signal they are done.
Wolf von Rotberg, equity strategist at Bank J Safra Sarasin also expects the Fed will have to scale back to a 0.25% increase.
According to von Roberg:
The CPI number is no game changer. After the events last week, a 50bps appeared unlikely going into the data print today and the slightly stronger than expected core inflation print puts speculation of a Fed pause to a rest.
The Fed is on track for another 25bps hike next week. Equities should rebound somewhat as the Fed becomes more predictable for now. But the impact from higher rates on the economy is just starting to be felt and will likely become more and more visible as the year moves on.
Ian Lyngen, rates strategist at BMO Capital Markets is on the fence about whether we’ll see a pause or a 0.25% increase.
“Overall, this is an inflation update that, taken as a sole input, would suggest that a 25 bp hike next week is a foregone conclusion,” Lyngen said. “Alas, the regional banking stress leaves next week’s decision as a wild card until there is greater clarity on the success of limiting the contagion to the rest of the banking sector from SVB/Signature.”
Meanwhile, Susannah Streeter, head of money and markets at Hargreaves Lansdown, thinks the SVB collapse could see the Fed take a breather. That would likely see another positive day of trading on the ASX 200.
“Policymakers may still feel forced to press pause on rates, despite evidence the hot inflation is still a risk, unwilling to be blamed for making a bad situation worse,” Streeter said.
“While smaller banks remain under pressure, there are concerns that bigger banks could become more risk averse in lending, which could dip the economy into a sharper downturn.”
There you have it.
Most likely next Thursday morning ASX 200 investors will find the Fed has raised rates by 0.25%. Very few experts are now forecasting a 0.50% increase, with some expecting the central bank to pause its tightening policies to assess the fallout from SVB.
