Central Banks Again in the Spotlight
US macro: The Fed is set to push rates deeply into restrictive territory in order to bring down inflation to more reasonable levels. It still believes, though, that doing so will only have a limited impact on the unemployment rate. Though we recognise that this scenario is plausible, we think it will be difficult for the Fed to avoid a large increase in layoffs.
Swiss National Bank: As widely expected, the SNB hiked its policy rate by 75bp, but sent less hawkish signals than other central banks. The SNB also introduced a new tiering system for reserve remuneration paying interest only up to a certain level of excess reserves. Finally, we note the central bank’s preference for a moderately higher Swiss Franc.
ECB: We find that euro area banks have no incentive to repay their TLTROs ahead of sched-ule as they will be able to earn a substantial spread from them in 2023/2024.
China macro: China will kick off its 20th National Congress of the Chinese Communist Party on October 16. Apart from the confirmation of Xi Jinping’s third term, the likely turnover of senior economic policymakers will be important to watch.
US equities: Real rates continue to suggest 5% to 6% downside for equity markets. Additionally, dividend yields still appear low and total income yields (dividend + buyback) are now below US corporate bond yields for the first time since 2010. The current valuation backdrop does not yet provide enough comfort to add substantial equity exposure.