Market thinks Fed will pause hiking interest rates to take stock, UK strategist says

Roger Lee, head of U.K. equity strategy at Investec, discusses Fed strategies, equities, U.K. stocks and the U.K. gilt crisis.

Uh good morning and thank you for having me on your show yes know where the fed’s terminal rate is is clearly what is absolutely critical to markets at the moment and really you know what drove uh what drove the u.s equities yesterday i mean it’s quite difficult to discern exactly what it was that was driving them because obviously they had this huge swing on the

Day but there seems to be some sense that uh the us is hitting peak inflation but what drove the market is not necessarily what was really interesting yesterday it was the shape of the market that was so interesting and yesterday we saw for the first time in one of these big rallies that we’ve had it wasn’t necessarily the fed pivot narrative that’s what’s been

Driving markets or driving the us rallies over the summer is the idea that the fed would pivot at some point next year uh yesterday’s shape was very very different yesterday’s was more it was led by financials and specifically the best performing sector was regional banks second best was energy now that suggests and that suggests that the fed is how the market

Is assuming the fed is going to pause so this fed pause narrative is what emerged yesterday and that led to a very very different outturn in terms of the shape of the market and of course would lead to a very very profound outcome for the market going forward if indeed the fed do put another couple of rate risers through and then pause and watch the data roger

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Just piecing a few bits together because i did note that movie in the regional banks as well we had a little bit of chatter out there yesterday that perhaps the fed would give a little bit of air time to the fact that we’re seeing some distortions or strains out there in the markets if we talk about the regional banks these are typically the lenders where you see

Some of the pain points felt first they are lenders to main street lenders to regional areas and lifelines for economies should we be concerned about any of these regional lenders down the track if we get very high terminal rates oh i think that was the problem with the reaction yesterday was this idea that uh perhaps that terminal rate or maybe not necessarily

The terminal rate but just the rate that we’re going to get to uh in this year and then the potential pause as the fed watches the data i mean we’ve had a relentless rise in interest rates over the course of the last nine months and so at some point at some point the fed will presumably want to take stock of where they’ve got to they’ll want to see where the data

Is coming through and if and i think as you mentioned in your earlier report i mean if you are starting to see some of the components within the cpi inflation data that led inflation last year now starting to form that maybe the fed will will take time to pause and see how these interest rate interest rate rises that have been so so aggressive over the last six

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Nine months how they start to affect the economy and it’s that pause that i think could be very very interesting for equities not a pivot but a pause yeah i hope you’re well um look um ordinarily you must be absolutely salivating over some of these yields that are available on uk stocks uh look down the ftse it’s not uncommon to see seven eight nine percent in

Many cases but that’s ordinarily what about now well i mean the yields uh are very attractive they have been attractive for a while as we’ve discussed before i think what’s really important from a uk perspective at the moment is where interest rates peak it’s exactly the same debate that the market’s having in the us and it’s exactly the same debate that we’re

Having here in the uk where rates peak now the market at the moment reckons that the curve is suggesting five and a half percent next year in the uk now five and a half percent when you don’t need to be an economist or a strategist to suggest that five and a half percent interest rate is going to be very very harmful and very difficult for the uk economy now if

Those interest rate expectations start to fall then some of the value that’s in the uk market will start to perform better because the economy the outlook for the economy or certainly the outlook for interest rates is starting to improve and i think that’s sort of what you’re beginning to see and we had a warning from barrett developments this week the largest uh

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House builder in the uk are widely anticipated warning and the market the stock did form but it’s now back to where it was pre-warning so maybe some of this bad news finally is starting to be priced in

Transcribed from video
Market thinks Fed will pause hiking interest rates to take stock, UK strategist says By CNBC International TV