During a year that’ll be remembered by markets and enshrined in textbooks for the most aggressive Fed rate-hiking campaign since Paul Volcker, Nomura’s economics team has endeavored to stay ahead of the curve.
In January, the bank was among the first to raise the specter of 50bps hike increments, for example. Then, in April, Rob Dent called for consecutive 75bps hikes, a suggestion which, at the time, wasn’t consensus.
Perhaps emboldened by their own success (at least as it relates to preemptively conveying a heightened sense of urgency among policymakers before the market fully appreciated the Committee’s state of alarm), Nomura on Tuesday adopted a 100bps hike as their base case for next week’s meeting.
“The August CPI report suggests a series of upside inflation risks may be materializing,” Dent, along with Aichi Amemiya and Jacob Meyer, wrote, in a note published shortly after inflation figures blindsided traders, kneecapping equities and prompting a dramatic bout of bear flattening, as two-year yields pushed to fresh “since 2007” highs.
“Materializing upside inflation risks are likely to result in the Fed raising rates by 100bps at the September FOMC meeting, above our previous forecast of 75bps,” they went on to say. The bank still sees 50bps in November, but raised their forecast for the December meeting to 50bps from 25 (figure above).
The bank suggested investors don’t fully appreciate the extent to which inflation is embedded across the world’s largest economy. That, in turn, means markets are underpricing the likely scope of the policy response necessary to bring inflation to heel.
Although Nomura is a trailblazer in the context of big bank calls, I’d note that the commentary from Dent and his colleagues is generally aligned with concerns expressed by a number of big-name investors, as well as warnings from some former officials, many of whom worry rates will need to rise closer to 5% to ensure the job gets done.
“Despite the specific timing of [our] forecasts not always aligning with Fed policy action, in hindsight, the history of ratcheting up the size of rate hikes gradually suggests the Fed may have underestimated the risk of high inflation becoming entrenched,” Nomura said Tuesday, referencing the calls mentioned here at the outset.
The bank still sees another 25bps in February. Their terminal rate call is now 4.5% to 4.75%, above consensus and well higher than market pricing.
Terminal at 4.5-4.75%. This is hilarious. Don’t forget to buy this dip 🙂
Remember, St Volcker pushed rates to 17.6% in 1981, with an accompanying prime rate of 20%. I was there. Not hilarious.
nor would a deflationary spiral caused by over tightening, accompanied by crushing job losses and deep recession…
Our friend Kamil up there has previously expressed what certainly came across as an affinity for crypto. Right before a lot of it turned to dust this year. Given that, it’s little wonder he / she is hoping against hope that terminal isn’t somewhere up near 5%.
Also, as much as I wanted to believe the transitory narrative — and as much as I didn’t want the US economy to get stuck with broad-based inflation — it wasn’t transitory. And inflation is broad-based.
So, they gotta keep hiking. It’s either that, or admit that monetary policy is ineffective in certain inflation regimes and therefore they’re unable to meet their mandate. Since the latter option (i.e., an admission that it won’t always be possible to satisfy the inflation side of the mandate) is out of the question, it’s the former.
Look at this chart and tell me with a straight face that substantially higher rates are coming: https://www.longtermtrends.net/home-price-median-annual-income-ratio/
I’m good on “longtermtrends.net.” Thanks anyway, though!
And best of luck with that — what was it? — 5% or 6% you were so pleased about on your staked crypto. You’ll be able to get that risk-free in Bills pretty soon.
Predictions are a mug’s game but what the hay: 15,000 on BTC-USD by mid-October.
And unemployment above 10%.
This could get ugly fast for equities, even compared to the drops we have seen so far.
Sentiment is already rock bottom according to BofA’s survey and many stocks are in over 50% drawdowns. I don’t think it can get uglier for some these stocks. In my opinion, the risk lies with some of the big cap tech stocks, which are still overvalued in my opinion. It’s fools’ game to predict markets with any accuracy. All we can say with some degree of certainty is that higher rates will keep a lid on equity returns. Another leg down has also become almost a consensus view, so maybe this is the trough. That all said, something tells me, we haven’t really seen a market capitulation. Thank you, Mr H for keeping us informed.