From Morgan Stanley:
In a market focussed on aFed funds rate”lift off”, we introduce MSP0KE- the market expectation for pace of hikes. Getting to the moon can take time and a gradual path to Fed funds neutral underpins our focus on Defence and Cycle-Agnostic Growth stocks for ASX 200 Equities.
But Pace of Hikes More Important: Whilst the first rate hike (when it comes) will likely be greeted with a sigh of relief from markets, the most important part of the debate then opens up around the pace of rate hikes, as it is this path that puts context to the cycle and asset allocation debate. The reality keeps coming back to a growth outlook that is lower-trend in DM and below-trend in EM, and where consensus is continually being lowered as markets grapple with just what the growth prize will be after years of cheap money.
The MB view at this point is that three hikes will be enough to plunge the globe into recession. The problem is not the US, rather it’s everyone else. As capital floods out of emerging markets, the US dollar rockets (even more given QE everywhere else), and as commodity prices keep tumbling, EM and commodity debt is going to enter some kind of shakeout long before we reach rates “normalisation” in the US.
Like it or not, the Fed is central bank to the world.
