Fed – Higher for longer, yet again
The Fed held rates unchanged as expected, but surprised markets with hawkish projections. The committee raised 2024 and 2025 rate forecasts by 50bps to 5.1% and 3.9% respectively. In addition, growth was marked higher for 2023 and 2024, while inflation was seen broadly stable, and unemployment was revised lower, overall pointing to a soft-landing scenario. The board continues to project one additional hike this year, thereby maintaining the tightening bias amid the improved economic outlook.

Global Risk – Fed puts market in pain
The Fed’s hawkish projections caught markets off-guard, and caused rates markets to bear steepen, as the US 30Y yield rose 14bp on the week, compared to just 8bps on the 2Y. In Europe, the Eurostoxx 50 dropped almost 2% throughout the week, while iTraxx Xover spreads rose 30bps to 420. Tighter monetary policy paired with events like UAW strikes, the resumption of student loan repayments and continued higher energy prices make risk markets vulnerable into Q4.

Global Monetary Policy – In different worlds
The BoE surprised markets by holding rates at 5.25%. The decision was on knifes edge with a 5-4 vote, and followed a dovish inflation print of 6.2% core YoY vs expectations of 6.8% on the previous day. The BoJ kept rates unchanged and remains the most accommodative among global central banks. In EM, Brazil’s BCB cut rates by 50bps to 12.75% as expected and signalled further cuts at 50bp intervals ahead. On the other end of the spectrum, Turkey’s CBRT hiked rates by 500bp to 30%, in line with expectations but still low amid 59% headline inflation.

Algebris Investments’ Global Credit Team