Raise - Skip - Pause

Analyst attention is currently focused on Q2 corporate earnings season, which kicked off last week with results from major US bank JPMorgan Chase. The start has been promising, however, we will only be able to draw the first conclusions when US big tech companies publish their figures. The highlight, in our view, will be next week's meeting of the Federal Reserve (Fed), as it will be the last before Fed members go on their summer break. That's right - the world's most powerful central bank will not make another interest rate decision until the end of September.

Last rate move?

On 26 July, investors expect the Fed to raise interest rates by another 25 basis points to a target range of 5.25% to 5.5%. Thereafter, financial markets expect 150 basis points of rate cuts until December 2024. We continue to believe that the Fed is already in the late stages of its tightening cycle. Therefore, it will make no difference whether another, and probably final, move of 25 basis points follows the massive rate hikes of 500 basis points in the past 16 months. Whether we see a hike this time, whether the Fed pauses again or whether it skips this date and signals a next move in September is, in our view, a side issue. What is more important is that there will be no tightening to above 6%. In our view, this remains a marginal scenario. Real interest rates in the US are therefore likely to have peaked.

Expectations for rate cuts

It is interesting to note that investors' expectations of interest rate cuts in the coming quarters have risen again in recent weeks. Contrary to market expectations, we continue to believe that there is little potential for rate cuts in the next 12 to 18 months. Similar to the spring of 2023, when investors were confronted with the US regional bank crisis and expected interest rate cuts, we see no reason for an easing of monetary policy in the near future. The fight against inflation is not over yet. The US labour market, with an unemployment rate below 4%, continues to signal overemployment and thus price pressure.

No gifts

In this environment, there will be no central bank gifts for investors, and the most important success factor for the second half of the year remains selection. Within equities, quality is key. The reporting season will show which companies not only beat expectations but also provide a solid outlook for the second half of the year.