Beware of 'fine print' in Powell's message, experts warn

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Beware of 'fine print' in Powell's message, experts warn

By Laura Sánchez - European markets climbed on Thursday. Ibex 35 , CAC 40 , DAX encouraged by the rises in Asia and Wall Street after the words of Jerome Powell, president of the U.S. Federal Reserve (Fed), who suggested a slowdown in the pace of interest rate hikes of the agency from this coming December meeting.

"Many investors feared the Fed chair would take a max hawkish sledgehammer to the recent easing of financial conditions ... That overhang has now gone," said Krishna Guha, head of global policy at Evercore ISI.

However, the gains in European markets are not as strong as the rest of the world. And that is because, despite the general mood, experts point to some factors that should not go unnoticed by investors.

"This speech doesn't really bring anything new; nothing that investors didn't already know," noted Link Securities.

"In fact, before Powell's speech, the market was giving a probability close to 75% that, at the December meeting, the Fed will raise its rates by 50 basis points compared to the 75 basis points at which it has increased them in the four previous meetings, a probability that remained at that level after the Fed chairman's speech," the experts added.

However, Link Securities noted that, from what the Fed chairman said yesterday, "investors were left with only the confirmation that the US central bank will begin to slow the pace of its rate hikes as soon as its December meeting, ignoring everything else."

"However, and in our view, 'everything else' is very relevant, as it implies that the Fed may raise its rates more than expected - the terminal rate is expected to be close to 5% versus the more optimistic estimates of many investors, which put it at 4.6% - and that it is willing to keep them at that level for as long as necessary given the resilience that the US economy and labor market have been showing and the expectations that inflation will continue well above its 2% target," said the experts.

"Therefore, and in our view, the US stock market's reaction yesterday is not entirely justified if we go by what Powell said. It was more of a relief rally on investors' fears that the Fed chairman was reluctant to confirm that in December the central bank will moderate the pace of its rate hikes," they said.

"We do not rule out that the advances in the stock markets were amplified - in addition to Powell's words - by the end of the month," noted Renta 4.

At Bankinter, meanwhile, they also warn of Powell's remark that, although he aligned himself with some members who recently anticipated a possible more moderate rate hike at the next meeting in December, "Powell expects the terminal rate to be higher than expected."

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