Weekly view—Pre-emptive guidance
The CIO Office's view of the week ahead
As uncertainty continues to run high, so does anticipation around the Fed’s meeting this Wednesday. The Fed is now confronted with a dilemma: economic data is not soft enough to merit rate cuts, as evidenced by last week’s US retail sales data. However, inflation expectations have reached new lows, adding pressure on the Fed to cut. Meanwhile, markets have priced in two rate cuts for the year, the first for July. While the Fed is widely expected to deliver dovish guidance, how far they go will be decisive in terms of the timing of any cuts. So far, the Fed’s dots still indicate rate hikes next year. If market expectations for cuts are not met, we could see a jump in market volatility. Unless US-China trade talks completely derail, we expect a first Fed rate cut to come no earlier than September, in contrast to what markets have priced in. We remain neutral on US duration.
Geopolitics are aggravating the economic picture, with another week, another tension. Crude oil prices jumped in the wake of the oil tanker attacks in the Gulf of Oman, after falling for four consecutive weeks on rising US inventories. At the same time, mass demonstrations in Hong Kong against a bill that would allow for extraditions to mainland China managed to shut down parts of the territory and rattle Hong Kong equities. Such events will continue to underscore the Fed’s current dilemma.
Meanwhile, companies are likely to continue to use uncertainty to lower guidance, as US chipmaker Broadcom did last week, sending not only its shares down, but also those of other key players in the sector. Slumping semiconductor demand is a sign of the challenges faced by the broader sector, which has been hit by both the trade war and the US crackdown on Chinese tech giant Huawei. Because of this uncertainty and downward expected earnings revisions, we are underweight equities and continue to prefer companies that are exposed to domestic markets over those reliant on international trade.
César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management