Lower than expected US inflation numbers for October triggered a market rally, as investors bet that the US Fed will temper its hawkish stance and scale back rate hikes.
US consumer price index (CPI) for the month increased by just 7.7% y-o-y, a visible easing off from 8.2% chalked up in the preceding month of September.
“In our view, if future CPI prints continue to show a sustained decline, we believe the Fed may consider pausing their rate hikes depending on economic conditions and the health of the labour market,” says Simon Teo, senior strategist at Phillip Nova.
“A less hawkish Fed could result in lower interest rates which means a lower cost of borrowing for businesses, giving them greater access to cheaper debt to help them further expand the business,” adds Teo.
He suggests that investors can use this opportunity to take a look a closer look at quality stocks that have been beaten down to attractive prices thus far this year, including growth-oriented tech sector and cyclical stocks.
Specifically, Teo favours leading semiconductor names like Nvidia Corp, Advanced Micro Devices and Marvell Technology, all of which had dropped by around half year to date.
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Within the e-commerce space, he likes Amazon.com, Sea and Etsy. These counters have dropped by between 40% and 80% year to date.
David Chao, global market strategist, Asia Pacific (ex-Japan), at Invesco, says he will remain defensive in the near-term, with an overweight on quality assets such as government and investment grade bonds.
“I think the current macro uncertainties should fade starting at the end of Q1 /Q2, and that investors should start preparing for growth and inflation dynamics to improve,” says Chao.
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Stephen Innes, managing partner at SPI Asset Management observes that the price pace might have slowed, but the price level is still too high. “Workers will demand compensation for two years of negative real earnings growth. Hence the labour market must loosen,” says Innes.
He adds that investors should look beyond the Fed’s “step-down” or “step up” of the rates. They need to weigh how long does the Fed need to hold the policy rate high.
“Keeping rates at 5% for longer to deal with that last bit of potential structural inflation differs from a full pivot into lower policy,” says Innes.
