Regional banks are getting hammered, and the Federal Reserve is not about to ride the rescue. That’s because the Fed is still fighting rampant inflation, so the banks are stuck with losses in their bond portfolios due to the big spike in interest rates.
The market is expecting at least a hint that the Fed will head into neutral after one last rate increase, and Deuterium isn’t disagreeing. “Our models are saying they’ll probably go on a pause because our work on inflation suggested this was really a monetary phenomenon, and the real monetary push on inflation was in the third quarter of 2020,” said John Ricciardi, head of global asset allocation at Deuterium Capital Management.
But the good news for companies is that the dollar is weakening — the firm is in particular betting on the dollar to fall vs. the Japanese yen and the Swiss franc — and inventories are getting depleted. “it’s one of the best modeling things I know,” he said. “Twelve months after when the inventories are going, you get a rebound in production. We’re going to get that now.”
The biggest risk, says Vijay Modhvadia, managing director at Deuterium, is the Fed taking interest rates up to 6% or beyond. “The market is not prepared for that, and then obviously, we’ll go into a hard recession,” he said. “The biggest risk is central bank policy mistakes.” The buzz The Fed makes its interest-rate decision at 2 p.m. Eastern — a quarter-point rate hike is seen as an 85% probability in fed funds futures contracts — followed by a press conference with Chair Jerome Powell at 2:30 p.m. The economic calendar also includes the ADP employment report and the Institute for Supply Management services index.