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Speaker 1: Let's get to Anastasia Amarosso, chief investment strategists at I Capital. Anastasia,

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Speaker 1: the FEDS news conference is very interesting with Jerome Powell.

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Speaker 1: He really covered a lot there and you know, credit

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Speaker 1: to the questions coming in, but also his his poison.

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Speaker 1: I think he did deflect people now away from the

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Speaker 1: pace of tightening and we're more focused on the on

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Speaker 1: the terminal rate and whether we can get up over

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Speaker 1: five percent now. But it's very important that he talked

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Speaker 1: about the cumulative effect of the tightening and the lag effect.

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Speaker 1: Where do we go from here for this feed? Yeah,

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Speaker 1: this was a big reality check for the markets because

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Speaker 1: you right, everybody anticipated that the federal focus on the

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Speaker 1: cumulative degree of tightening that is still to hit the economy,

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Speaker 1: and they certainly acknowledge that, but very quickly the Powell

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Speaker 1: actually pivoted away from that. And the big game changer

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Speaker 1: is that while the markets weren't diticipating and the FED

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Speaker 1: was anticipating for them to maybe pause around four point

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Speaker 1: six four point nine percent, we now have a five handle,

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Speaker 1: five percent handle across priced in across the markets. And

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Speaker 1: this is really kind of a pivotal point because in

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Speaker 1: the same breath. Fetcher Powell said that we don't really

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Speaker 1: know how high we're going to have to take the rate,

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Speaker 1: but it seems like five percent is at least that level,

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Speaker 1: because at that level that would surpass that the rate

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Speaker 1: of coren PC inflation of five one percent. But again,

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Speaker 1: there's ways to go to get to the terminal rate.

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Speaker 1: That was really unnerving for the markets. But the next

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Speaker 1: step is clearly the next stop is clearly five percent,

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Speaker 1: but we just don't know if we're actually going to

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Speaker 1: stop there. Yeah, a ways to go. UM, it's going

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Speaker 1: to be very interesting to get the next dot plot

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Speaker 1: as well. What do you expect that's gonna look like. Well,

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Speaker 1: we got a very strong hint from Fetcher Powell that

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Speaker 1: the next set of dots is going to be higher

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Speaker 1: in December that where we got in September. Uh, and

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Speaker 1: it seems like it could be materially higher, which makes

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Speaker 1: sense given some of the inflation developments in the labor

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Speaker 1: market developments. UH. Clearly, if it has not been getting

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Speaker 1: what it wants on inflation, it's not it's been stubbornly high.

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Speaker 1: It's not coming down. He mentioned that UH goods inflation

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Speaker 1: is not coming down as fast. As they like, and

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Speaker 1: service inflation is heating up, and then at the same time,

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Speaker 1: the labor market just continues to be so resilient in

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Speaker 1: the US. The job opening is continue to be up there,

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Speaker 1: and the pace of job creation has slowed, but it's

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Speaker 1: still very healthy. It's not fall off the cliff. So

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Speaker 1: that means that the FED wants to get to restrictive

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Speaker 1: rate territory, and that restrictive rate territory may still have

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Speaker 1: to be higher. So I suspect that one of the

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Speaker 1: key risk to watch coming into December is going to

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Speaker 1: be a more material reset uh in rate trajectory. So

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Speaker 1: never mind what he thinks, I want to know what

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Speaker 1: you think. Does the path through five percent for the

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Speaker 1: FED funds rate include recession? I think it does. I

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Speaker 1: think it does. I think anybody who is paying attention

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Speaker 1: to a variety of economic indicators really can't roll out

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Speaker 1: a recession. And there's a number of measures to point to,

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Speaker 1: whether it's the Fed's preferred measure of yield curve three

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Speaker 1: months to ten year, whether it's just the imply probabilities

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Speaker 1: from all the economic indicators are right now, the historical

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Speaker 1: probability is eighteen and Anastasia when we lift off. You

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Speaker 1: were mentioning that you don't see us getting out of

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Speaker 1: this tightening cycle without a recession. But I want to

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Speaker 1: take a look at that market reaction as well. A

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Speaker 1: bit of a head fake really from the FIT markets

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Speaker 1: initially responding positively and then selling off as JPL spoke.

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Speaker 1: But why does the market keep misreading the FIT. Inflation

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Speaker 1: is high, jobs data is strong, it's been pretty unambiguous

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Speaker 1: about the path forward. But is hope getting a hit

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Speaker 1: of reality here? Well, I think to give a little

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Speaker 1: bit of credit to the markets, if you've read the statement,

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Speaker 1: you would have assumed that the FED is kind of

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Speaker 1: getting ready to maybe slow down, maybe pivot, even though

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Speaker 1: it's gonna they're still gonna hold rates pretty high because

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Speaker 1: they're concerned about how much they've done so quickly, and

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Speaker 1: with the lack effects of that is going to be

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Speaker 1: so I think the markets were right to kind of

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Speaker 1: read that initially positively. But where the markets I think

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Speaker 1: do keep misreading the FED and just the inflationary episode,

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Speaker 1: is that we're expecting a quick resolution to this inflationary episode,

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Speaker 1: and that's not what history suggests. If you look at

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Speaker 1: the last prior inflationary episodes, the last seven of them

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Speaker 1: prior to this one. The media and time that it

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Speaker 1: took from the time that inflation spiked above two percent

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Speaker 1: for it to eventually settle back down towards two percent.

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Speaker 1: The media number of months is thirty months, and here

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Speaker 1: we are maybe twenty months into this, which still suggests

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Speaker 1: it's not a number of weeks or a couple of months,

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Speaker 1: but we still could be in this for the bulk

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Speaker 1: of So that's where I think the markets keep misreading

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Speaker 1: the Fed. They keep wanting a quick resolution and not

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Speaker 1: getting it. And look, the reality is that if the

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Speaker 1: FED does raise rates towards five that's a significant, a

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Speaker 1: very high hurdle rate that any investment has to overcome.

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Speaker 1: And what supported equities was low rates, which we don't

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Speaker 1: have anymore, but we can get used to it. I mean,

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Speaker 1: I think zero interest rates were bad in the sense

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Speaker 1: that it pushed a lot of people savers and some

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Speaker 1: investors into very risky investments and a lot of leverage

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Speaker 1: to make it work. It would get back to a

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Speaker 1: range of interest rates between three to five percent, assuming

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Speaker 1: that you get inflation eventually down sort of below that range,

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Speaker 1: it's probably overall better for the economy, don't you think.

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Speaker 1: I do agree with you. I think there's something extremely

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Speaker 1: healthy about finally getting out of this fourteen year pretty

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Speaker 1: much zero interest rate policy. And one of the silver

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Speaker 1: linings that we talk about now is there's no rush

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Speaker 1: to get back into the equity markets. And the reason

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Speaker 1: for that is because cash actually pays something today. It

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Speaker 1: is a place holder, and you can hide out in

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Speaker 1: cash and there's not this opportunity cost. And of course

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Speaker 1: inflation still erodes a portion of that return, but at

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Speaker 1: least cash pays something, So I think that's that's a

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Speaker 1: big game changer. I do also agree with you that

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Speaker 1: a lot of leverage built up in parts of the

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Speaker 1: system that needed to be stout. You know, maybe some

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Speaker 1: of that is crypto, maybe some of that is the

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Speaker 1: floating rate securities and leverage loan market. A lot of

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Speaker 1: the debt has been accumulated there. The US leverage loan

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Speaker 1: market tripled in size since the since the financial crisis,

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Speaker 1: and the credit quality has deteriorated. So that happens when

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Speaker 1: you build complacency about where rates are going next. So

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Speaker 1: I think we are going to look at the at

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Speaker 1: the UK pension market. That's right, that's right, and in

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Speaker 1: the US we don't have the same extent of the exposure.

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Speaker 1: For example, the percentage of pension fundances that are allocated

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Speaker 1: to treasuries is lower than what was allocated to guilty

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Speaker 1: in the UK. But nevertheless, you know anybody who's been

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Speaker 1: reliant on low interest rates, whether it's borrower's borrowing and

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Speaker 1: floating rate, or whether it's in Europe for example, um

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Speaker 1: the mortgage market. A lot of the countries in Europe

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Speaker 1: are financing those mortgages through floating rate, and the EU

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Speaker 1: war went from negative forty basis points basis points to

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Speaker 1: over two. That's where some of the risks slide today.

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Speaker 1: So cash can pay you something. Where else can you

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Speaker 1: go to white out this tightening cycle and get a return?

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Speaker 1: So I do like parts of the credit market I mentioned.

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Speaker 1: I'm not a big fan of the publicly traded leverage

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Speaker 1: loan markets because I think they are subject to some

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Speaker 1: of the reckoning that's to come and the technical dislocations.

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Speaker 1: But you can look to high yield, for example, where

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Speaker 1: the yield towards is approaching ten percent and the credit

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Speaker 1: quality and high yield actually has improved. You could also

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Speaker 1: look to the private credit space where those middle market

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Speaker 1: loans are still floating with securities, but they don't have

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Speaker 1: the same mark to market issue, they don't have the

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Speaker 1: same technical dislocations then the syndicated loan market does, for example,

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Speaker 1: and they do have private credit sponsorship, private equity sponsorship.

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Speaker 1: So I suspect a lot more support for those loans,

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Speaker 1: all right, and a Stagia mrs Chief Investment strategies that

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Speaker 1: are capital great insights. Thanks so much for joining us

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Speaker 1: on Bloomberg Daybreak Asia