As the gloom deepened in financial markets on Friday, Deutsche Bank, Wall Street’s most dovish bank, came out with another revealing view: Its US economists, led by Matt Luzzetti, now expect the Federal Reserve to resume its rate hike campaign finished at 4.9% in the first quarter of 2023. The notion of a policy rate close to 5%, which Deutsche Bank says is “well above” what the market is pricing, comes just days before the Fed’s next meeting on 20 September -21 and as investors remain concerned about how high interest rates will have to rise to handle the worst inflation in four decades. Investors were still trying to weigh in on the likelihood that the Fed Funds rate target is likely to rise above 4% by year-end, and the stock market continued the sell-off on Friday – fueled by a profit warning from FedEx Corp. (FDX), along with inflation and interest rate fears. Few, if any, market participants have spoken openly about the prospect of a near 5% interest rate target, which is essentially double the current level of 2.25% to 2.5%. Such a scenario would likely have an even bigger impact on stocks than what billionaire investor and hedge fund manager Ray Dalio predicted, who estimates that interest rates at 4.5% would have a 20% negative impact on stock prices.
Meanwhile, a key market interest rate — the one-year Treasury yield — was around 4% on Friday after breaking through that level earlier — a development some say is spilling over to other interest rates and worries in U.S. financial markets could aggravate and abroad. “Matt has always been the best on the street for economists over the last few months” when it comes to forecasting interest rates, Deutsche Bank’s Jim Reid, Henry Allen and Tim Wessel wrote in a note on Friday. The bank’s US economists revised their expectations after Tuesday’s hotter-than-expected August CPI report, and the hike is now closer to the 5% to 6% range that some say Deutsche Bank needs to keep inflation under control tame. Friday brought another soft day in financial markets as all three major stock indices are down since the New York opening. Meanwhile, Treasury yields initially rose on a sell-off in government bonds before stabilizing as bond buying surfaced. Deutsche Bank was the first major Wall Street bank to declare a US recession in April. That same month, it went further and said it sees downside risk to its own bearish view. In June, Wessel, a macro strategist, said he sees a chance inflation will not slow. And just three days ago, Allen, a research analyst, said “on this occasion, unfortunately, the pessimists will prevail” in the debate over whether the US economy can achieve a soft landing.
-Vivien Lou Chen
(ENDS) Dow Jones Newswires
09/16/22 1136ET
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