As the Federal Reserve hastens the unwinding of its balance sheet this month, some investors worry that quantitative tightening may weigh on the economy and make this year even more brutal for stocks and bonds.
After roughly doubling its balance sheet to $9 trillion after the pandemic, the Fed began unloading some of the Treasuries and mortgage-backed securities it holds in June at a pace of $47.5 billion.
It has announced that this month it is increasing the pace of quantitative tightening to $95 billion.
The scale of the Fed’s unwinding is unprecedented and the effects of the central bank ending its role as a consistent, price-insensitive buyer of Treasuries has so far been hard to pinpoint in asset prices.
However, some investors are cutting back equities or fixed income as quantitative tightening accelerates, wary that the process could combine with factors such as higher interest rates and a strengthening dollar to further weigh on asset prices and hurt growth.
“The economy is already in a glide path to recession and the Fed's quickening pace in terms of QT will accelerate the decline in stock prices and increase in bond yields,” said Phil Orlando, chief equity market strategist at Federated Hermes, who recently increased his cash allocation to a 20-year high.
The Fed's tighter monetary policy has weighed on stocks and bonds in 2022. The S&P 500 is down 14.6 per cent while the yield on the benchmark 10-year US Treasury, which moves inversely to prices, recently stood at 3.3 per cent, after surging 182 basis points this year.
Although recent data has shown that the US economy has remained resilient in the face of higher interest rates, many economists believe tighter monetary policy is increasing the chances of a recession next year.
The New York Fed projected in May that the central bank would shave $2.5tn off its holdings by 2025.
Estimates vary for how this will affect the economy: Orlando, at Federated Hermes, said every $1tn in Fed balance sheet reduction would equate to an additional 25 bps in implicit rate increases.
Ian Lyngen, head of US rates strategy at BMO Capital Markets, estimates it could add up to 75 bps through the end of 2023 alone.
On the other end, Solomon Tadesse, head of North American Quant Strategies at Societe Generale, believes the Fed will ultimately cut $3.9tn off its balance sheet, equating to about 450 bps in implicit rate increases.
The Fed has already raised rates by 225 bps and another 75 basis point increase is expected later this month.
“It could be the ramp-up in [quantitative tightening] that could trigger the next fall in markets,” said Mr Tadesse, who believes the S&P could drop to a range of 2,900 to 3,200.
Investors next week will watch August consumer price data for signs inflation has peaked. The Fed will hold its monetary policy meeting on September 21.
Jake Schurmeier, a portfolio manager at Harbor Capital Advisers, said reduced liquidity from tightening financial conditions is already making it more difficult to take large bond positions and could contribute to more volatility ahead.
“It gives us pause before we make any moves,” he said.
While Schurmeier finds longer-dated Treasuries attractive, he is “hesitant to add more risk until volatility has dampened down”, he said.
Timothy Braude, global head of the outsourced chief investment officer programme at Goldman Sachs Asset Management, has been reducing his equity allocation in anticipation of more volatility due to the Fed's quantitative tightening.
“It is very hard to tell which markets are going to be the most affected,” he said.
To be sure, some investors doubt quantitative tightening will have an outsize effect on markets.
“The increase in the pace of QT has been known since the Fed announced its QT plans in May,” strategists at UBS Global Wealth Management wrote on Thursday.
“However, when combined with a hawkish Fed, market sentiment focuses on the higher pace even though the impact to the marketplace over the long term is not material.”
The energy crisis in Europe, the pace and duration of the Fed's interest rate increases, and a potential US recession are expected to trump quantitative tightening as market drivers, said David Bianco, chief investment officer for the Americas at the DWS Group.
“We are not dismissing the risks of QT but they pale in comparison to the risks of where the Fed hikes the overnight rate and how long they have to stay there,” he said.
Rebel%20Moon%20-%20Part%20One%3A%20A%20Child%20of%20Fire
Transgender report
Our commentary on Brexit
- Alistair Burt: Despite Brexit, Britain can remain a world power
- Con Coughlin: Choice of the British people will be vindicated
Killing of Qassem Suleimani
National Editorial: Suleimani has been killed, now we must de-escalate
Jack Moore: Why the assassination is such a monumental gamble
Matthew Levitt: Iran retains its ability to launch terror attacks
Damien McElroy: A CEO tasked with spreading Iran's influence
Hussein Ibish: Trump's order on solid constitutional ground
Simon Waldman: Cautious Israel keeping a low profile
Red flags
- Promises of high, fixed or 'guaranteed' returns.
- Unregulated structured products or complex investments often used to bypass traditional safeguards.
- Lack of clear information, vague language, no access to audited financials.
- Overseas companies targeting investors in other jurisdictions - this can make legal recovery difficult.
- Hard-selling tactics - creating urgency, offering 'exclusive' deals.
Courtesy: Carol Glynn, founder of Conscious Finance Coaching
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What the law says
Micro-retirement is not a recognised concept or employment status under Federal Decree Law No. 33 of 2021 on the Regulation of Labour Relations (as amended) (UAE Labour Law). As such, it reflects a voluntary work-life balance practice, rather than a recognised legal employment category, according to Dilini Loku, senior associate for law firm Gateley Middle East.
“Some companies may offer formal sabbatical policies or career break programmes; however, beyond such arrangements, there is no automatic right or statutory entitlement to extended breaks,” she explains.
“Any leave taken beyond statutory entitlements, such as annual leave, is typically regarded as unpaid leave in accordance with Article 33 of the UAE Labour Law. While employees may legally take unpaid leave, such requests are subject to the employer’s discretion and require approval.”
If an employee resigns to pursue micro-retirement, the employment contract is terminated, and the employer is under no legal obligation to rehire the employee in the future unless specific contractual agreements are in place (such as return-to-work arrangements), which are generally uncommon, Ms Loku adds.
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Specs
Engine: 51.5kW electric motor
Range: 400km
Power: 134bhp
Torque: 175Nm
Price: From Dh98,800
Available: Now
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Engine: Duel electric motors
Power: 659hp
Torque: 1075Nm
On sale: Available for pre-order now
Price: On request
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England squad
Joe Root (captain), Alastair Cook, Keaton Jennings, Gary Ballance, Jonny Bairstow (wicketkeeper), Ben Stokes (vice-captain), Moeen Ali, Liam Dawson, Toby Roland-Jones, Stuart Broad, Mark Wood, James Anderson.
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House-hunting
Top 10 locations for inquiries from US house hunters, according to Rightmove
- Edinburgh, Scotland
- Westminster, London
- Camden, London
- Glasgow, Scotland
- Islington, London
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- Highlands, Scotland
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- Fife, Scotland
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Tips for taking the metro
- set out well ahead of time
- make sure you have at least Dh15 on you Nol card, as there could be big queues for top-up machines
- enter the right cabin. The train may be too busy to move between carriages once you're on
- don't carry too much luggage and tuck it under a seat to make room for fellow passengers
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EPL's youngest
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SHAITTAN
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Auron Mein Kahan Dum Tha
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Jetour T1 specs
Engine: 2-litre turbocharged
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Jack Moore: Why the assassination is such a monumental gamble
Matthew Levitt: Iran retains its ability to launch terror attacks
Damien McElroy: A CEO tasked with spreading Iran's influence
Simon Waldman: Cautious Israel keeping a low profile
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- Con Coughlin: Choice of the British people will be vindicated
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The burning issue
The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE.
Read part four: an affection for classic cars lives on
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Read part one: how cars came to the UAE
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The specs: 2018 Kia Picanto
Price: From Dh39,500
Engine: 1.2L inline four-cylinder
Transmission: Four-speed auto
Power: 86hp @ 6,000rpm
Torque: 122Nm @ 4,000rpm
Fuel economy, combined: 6.0L / 100km
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- Engine: 3.9-litre twin-turbo V8
- Power: 640hp
- Torque: 760nm
- On sale: 2026
- Price: Not announced yet
Zayed Sustainability Prize
Pandemic Parenting
Sole survivors
- Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
- George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
- Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
- Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
EMERGENCY PHONE NUMBERS
Estijaba – 8001717 – number to call to request coronavirus testing
Ministry of Health and Prevention – 80011111
Dubai Health Authority – 800342 – The number to book a free video or voice consultation with a doctor or connect to a local health centre
Emirates airline – 600555555
Etihad Airways – 600555666
Ambulance – 998
Knowledge and Human Development Authority – 8005432 ext. 4 for Covid-19 queries
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Editorial: The fight against Covid-19 should be guided by science
Teaching in coronavirus times
Emergency
Director: Kangana Ranaut
Stars: Kangana Ranaut, Anupam Kher, Shreyas Talpade, Milind Soman, Mahima Chaudhry
Rating: 2/5
KILLING OF QASSEM SULEIMANI
National Editorial: Suleimani has been killed, now we must de-escalate
Mina Al Oraibi: Air strike casts a long shadow over the decade ahead
Jack Moore: Why the assassination is such a monumental gamble
Matthew Levitt: Iran retains its ability to launch terror attacks
Damien McElroy: A CEO tasked with spreading Iran's influence
Hussein Ibish: Trump's order on solid constitutional ground
Simon Waldman: Cautious Israel keeping a low profile
E-cigarettes report
Conflict, drought, famine
Estimates of the number of deaths caused by the famine range from 400,000 to 1 million, according to a document prepared for the UK House of Lords in 2024.
It has been claimed that the policies of the Ethiopian government, which took control after deposing Emperor Haile Selassie in a military-led revolution in 1974, contributed to the scale of the famine.
Dr Miriam Bradley, senior lecturer in humanitarian studies at the University of Manchester, has argued that, by the early 1980s, “several government policies combined to cause, rather than prevent, a famine which lasted from 1983 to 1985. Mengistu’s government imposed Stalinist-model agricultural policies involving forced collectivisation and villagisation [relocation of communities into planned villages].
The West became aware of the catastrophe through a series of BBC News reports by journalist Michael Buerk in October 1984 describing a “biblical famine” and containing graphic images of thousands of people, including children, facing starvation.
Band Aid
Bob Geldof, singer with the Irish rock group The Boomtown Rats, formed Band Aid in response to the horrific images shown in the news broadcasts.
With Midge Ure of the band Ultravox, he wrote the hit charity single Do They Know it’s Christmas in December 1984, featuring a string of high-profile musicians.
Following the single’s success, the idea to stage a rock concert evolved.
Live Aid was a series of simultaneous concerts that took place at Wembley Stadium in London, John F Kennedy Stadium in Philadelphia, the US, and at various other venues across the world.
The combined event was broadcast to an estimated worldwide audience of 1.5 billion.
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National Editorial: Suleimani has been killed, now we must de-escalate
Mina Al Oraibi: Air strike casts a long shadow over the decade ahead
Jack Moore: Why the assassination is such a monumental gamble
Matthew Levitt: Iran retains its ability to launch terror attacks
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• Round up: Experts share their visions of the world to come
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• Architecture is over - here's cybertecture
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Wenger's Arsenal reign in numbers
1,228 - games at the helm, ahead of Sunday's Premier League fixture against West Ham United.
704 - wins to date as Arsenal manager.
3 - Premier League title wins, the last during an unbeaten Invincibles campaign of 2003/04.
1,549 - goals scored in Premier League matches by Wenger's teams.
10 - major trophies won.
473 - Premier League victories.
7 - FA Cup triumphs, with three of those having come the last four seasons.
151 - Premier League losses.
21 - full seasons in charge.
49 - games unbeaten in the Premier League from May 2003 to October 2004.
Zayed Sustainability Prize
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The specs
Honeymoonish
The specs
AT4 Ultimate, as tested
Engine: 6.2-litre V8
Power: 420hp
Torque: 623Nm
Transmission: 10-speed automatic
Price: From Dh330,800 (Elevation: Dh236,400; AT4: Dh286,800; Denali: Dh345,800)
On sale: Now
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Essentials
The flights
Emirates and Etihad fly direct from the UAE to Geneva from Dh2,845 return, including taxes. The flight takes 6 hours.
The package
Clinique La Prairie offers a variety of programmes. A six-night Master Detox costs from 14,900 Swiss francs (Dh57,655), including all food, accommodation and a set schedule of medical consultations and spa treatments.
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BMW M5 specs
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