Insync Funds Management (Insync) says there is now more evidence to support Insync’s view that expectations for official interest rate policy are moderating, paving the way for modest growth rather than a deep, protracted recession.
Insync expressed the view in an industry White Paper released this month Will the Second Half & Beyond for Equities be different to the first? (the White Paper), co-authored by Insync Portfolio Manager, John Lobb.
“Anecdotal evidence suggests that as we foretold, supply chain log jams are alleviating, the oil price has dropped well below $100/barrel and agricultural goods price inflation is decelerating; particularly wheat which has returned to December 2021 levels,” Mr Lobb said.
There is also hard evidence that although Insync expects at least another 50bps in tightening by the Federal Reserve, the risks of the target rate exceeding 3.5 per cent remain low.
“The United States Michigan 5-Year Inflation Expectations, which is considered the pre-eminent gauge in setting the Federal Fund Rate, reveals consumers have tempered their expectations regarding annual price momentum,” Mr Lobb said. “As a result, equity markets have begun the second half of 2022 with a respectable 10 per cent rally.”
In the White Paper, Insync had said that while there is a sound basis for arguing that the Federal Rate is currently too low, it is unlikely to be lifted more than 3.5 per cent due to the combined effect of slowing GDP growth and peaking shorter term inflationary expectations.
“Long term inflation averages a little over 3%, yet in the last 10 or so years we got used to a once in a lifetime decade of ultra-low rates. Normalisation is not anti-growth,” the White Paper said.