US: Risk rotation before Fed


As the Fed approaches, risk perception rises. Concerns that the central bank will implement a faster and more aggressive monetary tightening than expected, as well as the economic slowdown and geopolitical tension are the main drivers of low risk appetite. The first Fed FOMC meeting of the year will be watched closely for signs of imminent rate hikes expected as early as March. US treasury yields and the dollar alike found strength this week ahead of the Fed meeting, while US stocks are stuck between balance sheet effects and hawkish Fed expectations. The Fed meeting, along with likely solid Q4 GDP pressure and balance sheet updates, will be key market drivers for this week.


Fed uncertainty is actually an emergency and a phenomenon to be followed in the focus of value investment and growth in terms of markets. It is possible that the growth focus will be subject to correction according to the aggressiveness of the tightening. On the rate hike point, the 3 rate hikes seemed to be within the consensus until last week. However, especially the recent opinions of investment banks show that the consensus has completed 4 rate action zones, and it tends to enter the 5th rate hike zone slowly. Of course, if the Fed starts with 50 basis points, it will not matter how many times it raises interest rates. Nevertheless, we estimate that real interest rates will not move very fast due to the fear of causing a sharp decline. The situation with regard to inflation; It’s not about money rotation, it’s about the supply chain. In other words, there is no demand inflation created by the circulation of money in the market, there is cost inflation due to the supply problem.


The factor of how much the balance sheet will shrink is important, after all, the balance sheet actually grows technically until the asset purchases are completely finished in March. Balance sheet needs to be cut by more than half to get down to February 2020 level.

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