positive reaction to FED rate cut, but uncertainty persists

Last quarter full of events, culminating in the surprise cut in interest rates Federal Reserve (Fed) by 50 basis points (bps). Risk asset markets reacted positively, at least initially, but we believe this underestimates the uncertainty arising from recent economic data and downward revisions to corporate earnings estimates. He underlines itSriram Reddyhead of Client Portfolio Management, Discretionary, ManGroup.

FED: positive market reaction to rate cuts

The slowdown in employment in the United States and other economies, as well as the decline in wage growth, are revealing signs of tension among consumers, he explains in the analysis, underlining that “household finances have deteriorated from the high levels immediately following the Covid pandemic. The percentage of credit delinquencies exceeding 90 days is at a short-term high and is actually approaching 2007 levels for both credit cards and car loans.”

but uncertainty persists

“We also see signs of stress a company levelwith U.S. discount retailers, companies that provide credit for automobile purchases to low-credit individuals, and the global auto sector all significantly revised earnings down during the third quarter. The contraction in consumer demand is not an exclusively US phenomenon; there is more and more evidence of growing pressure on European and Chinese consumers. A possible glimmer of light is represented by the Fed’s rate reduction path, which could help unlock further monetary easing in other markets, particularly the Chinese one, thus alleviating some of the concerns about growth.”

Nonetheless, “we are cautious in allocating to cyclical segments of the market, which have not translated some of the recent economic data into widening spreads (although we have seen significant repricing in equity markets). Indeed, credit volatility remains at very low levels. In this context, we believe that investors should take a careful approach to selecting stocks on the long side, with greater opportunities for implement short convex in the coming quarters”.

The tug of war continues

For investors, “the tug of war between attractive yields and tight spreadscontinues you. We see opportunities in both public and private credit, where investors can secure attractive returns amid declining money market yields in the coming quarters as the Fed is likely to continue cutting rates. However, we must continue to keep in mind that spreads remain at top-quartile valuations across all credit sectors: investment grade (IG), high yield (HY), emerging market debt, loans, collateralized loan obligations (CLOs) and many other areas of credit.”