Since the U.S. Federal Reserve commenced its cycle of interest rate hikes in March of last year, the global market has been eagerly awaiting news of an economic cooldown in the U.S. Under tightening policies, bad news becomes good news.
This week's significantly lower-than-expected CPI and PPI data have non-U.S. assets popping champagne. The offshore renminbi broke through 7.15 overnight, and major Wall Street banks are collectively bullish on China, Japan, and European stocks.
However, top hedge fund Bridgewater warns that the U.S. struggle with inflation is far from over and bets on the Federal Reserve's rapid rate cuts next year may be premature.
On Friday, Bridgewater Co-CIO Bob Prince, during a Financial Times interview, suggested that market expectations for the Federal Reserve's loosening of monetary policy may be disappointed.
The Chicago Mercantile Exchange's FedWatch tool indicates that the futures market predicts the Federal Reserve will hike rates by 25 basis points at the interest rate meeting in 12 days, possibly turning to rate cuts in the first quarter of next year. Most traders forecast that by the end of next year, the Federal Funds rate will drop 125 basis points from its current 5% - 5.25% to 3.75% - 4%.
However, Prince believes that although inflation has fallen back, the current level is still too high and may stay around this level. Continued strong wage growth may drive a rebound in energy prices, which in turn could cause inflation to rebound.
Prince explained that the current level of consumer spending in the U.S. is supported by wage income rather than credit, which means it would be hard for inflation to decrease.
Data released on Wednesday showed that the U.S. June CPI year-on-year declined from 4.0% to 3.0%, lower than Bloomberg's consensus expectation of 3.1%, marking a new low since April 2021. The core CPI year-on-year fell 0.5% to 4.8%, also lower than Bloomberg's consensus expectation of 5.0%.
Prince noted that although inflation has cooled significantly, the core inflation index remains above the Federal Reserve's target of 2%. He expects the core CPI to bottom out and rebound between 3.5% and 4%, pushing the Federal Reserve to further tighten monetary policy.
By "tighten," Prince is implying that the Federal Reserve might maintain high-interest rates unchanged even while the market eagerly anticipates rate cuts.
As for investment strategies at this stage, Prince suggested that the current environment is not suitable for holding bonds or stocks, and cash would be a preferable choice.
