Amir Argaman, the chief strategist of Clal Insurance and Finances, estimates that the statements of Fed Chairman Jerome Powell are good for the stock markets. of Governor Powell, who gave the market an indication that the process of falling inflation has already begun and the market has adopted the assumption that inflation will continue to fall and that the central bank is nearing the end of interest rate increases.”
At some point the interest rate may change its direction downwards and the optimists believe that this will happen this year. “In Britain, the governor said that the interest rate peak will be in the middle of the year and that they expect inflation to decrease during the year,” adds Argaman, “In Europe, they expect another interest rate increase of half a percent, and there they will take an approach of constant data examination, to decide when to end the interest rate increases.
“The Bank of Israel, because the inflation here was lower than in the US and Europe, was usually one step behind the central banks, and it will probably continue to do so. We expect inflation to be 2.5% to 3% this year, so the Bank of Israel can continue Respond according to the actions of the world’s central banks, and if they stop raising interest rates, it is likely that they will stop here as well.
Doesn’t the strong US employment report contradict the positions of the central banks?
“The markets reflect the thought that inflation will continue to fall quickly, against the background of a global economy that is going to weaken a little, not too much. This will allow the Fed to stop raising interest rates, and possibly even lower them during 2023.
“The market is based on the assumption of a slowdown in demand that will allow for a slowdown in inflation, and this is despite a strong employment report. A strong employment report indicates a strong economy and high demand, and the expected scenario now is a decrease in inflation, but a slow decrease.”
In other words, a weak labor market is a sign of a decrease in demand and subsequently a decrease in inflation, but even a good labor market does not guarantee high inflation, according to economists’ estimates it may be combined with a decrease in inflation, only at a slower rate than was initially estimated “In such a scenario, the central banks will once again be in a dilemma with their backs against the wall in terms of being able to stop interest rate increases or lower them.”
Recommendations for investors?
“We see an economy that is expected to weaken, corporate profitability with no growth at best, and a market that is priced at a multiple at least 2 points higher than the historical multiple we know, so even if we see the markets not going down, the “upside” here is definitely limited, especially when there is no alternative Bad in the bond market. We see in the government bond implicit returns of 4%-5% in the US, and of 3%-4% in Europe, so this has a much greater significance in the portfolios and it will continue to grow.
“In the government bond, we still see long-term potential because if a slowdown really materializes, we will see a decrease in yields, and if the economy strengthens – the decrease in yields is expected to stop and we will not see capital gains in the short term. In the corporate bond, although we see it as a very good alternative both in Israel and in the US compared to the stocks, we see a situation where the credit spreads are not attractive, that is, the overall return on the bonds is good compared to the stocks, but in relation to itself, the credit spreads that embody the risk – are not high. Therefore, it is not that the channel is risk-free, but it is an important part of the portfolio, especially compared to stocks.”
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