US Fed’s 75-point rate hike most likely, markets may remain under pressure: analysts

The US Federal Reserve is expected to raise the interest rate by 75 basis points (bps) in its meeting slated for today (Sept. 20) and tomorrow (Sept. 21), which is the most likely option, analysts told Argaam.

They added that this would keep the markets under pressure and limit the upward trend of the Saudi Exchange (Tadawul) in the near term. Meanwhile, others believe that the markets are close to rock bottom.

Global markets, including Tadawul, are anticipating the results of the Federal Reserve’s meeting on the interest rate.

The US central bank raised the interest rate four times this year, in March, May, June and July, between 2.25% and 2.50%.

Mohamed Abu Basha, head of macroeconomic analysis at EFG-Hermes, forecasts the Fed to raise the interest rate by 75 bps, especially after the recent reading of inflation data, which reflected the continued inflationary pressures, albeit at a slower pace than previous months.

Noureldeen Al-Hammoury, a business analyst, said the US central bank will most likely raise the interest rate by 75 bps again, ruling out a 100-bps hike.

He added that the Fed’s lower-than-expected interest rate hike by 50 bps would surprise the markets. This possibility should not remain insignificant.

On the other hand, Ashar Saleem, Assistant Fund Manager at Yaqeen Capital, said the recent inflation data reflects the strong possibility that the Fed would raise the interest rate by 75-100 bps, suggesting that the 75-basis point hike is more likely, compared to previous market expectations of an increase by 50-75 basis points.

Continued interest rate hike

Abu Basha expected that the interest rates would be raised at least twice by a total of 150 bps.

Meanwhile, Saleem believed that the Fed will continue to raise the interest rates until 2023, considering that inflation is a “monster” that is difficult to deal with. Therefore, it is enough to control inflation in a few quarters, he said, adding that inflation was reflected on all sectors after being limited to energy and real estate.

On the other hand, Al-Hammoury said several people expect the Fed to continue raising the interest rate harshly until next year, indicating that the inflation rate is still higher, but slowed down for more than four straight months.

This means that inflation reached its peak, Al-Hammoury said, indicating that the current slowdown in inflation is lower than forecasts.

“The Fed does not need to continue raising the interest rate for a long time, especially as the US entered an official recession stage after the GDP contracted for two consecutive quarters," he noted.

The Fed does not want to make a mistake twice after miscalculating the inflation before the significant increase that took place.

“We may witness a surprise from the Fed soon, as it may return to the stage of deliberation and wait for more evidence before starting the reduction of interest rate again in 2023, amid the possibility that the economic recession would deepen in the coming period,” Al-Hammoury said.

He pointed to what shipping companies, such as FedEx and UPS, warned of last week, which led to sharp market declines.

"I think that the interest rate hike has come to an end, and we are close to a completely different stage than what the markets expect,” Al-Hammoury said.

Impact of interest rate hike on financial markets and Tadawul

Abu Basha said raising the interest rate would keep the markets under pressure, but this will depend mainly on the Fed’s future interest-rate signals, as the markets will be cautious about any higher-than-expected hikes, in addition to delaying the interest rate cut beyond 2023.

The impact on Tadawul will depend relatively on the extent to which the Saudi Central Bank (SAMA) keeps pace with its US peer as regards the interest rate hike and the impact of the latter’s decisions on global economic growth and oil prices.

“In general, we believe that the rise in interest rates would limit the upward trend of the Saudi market in the near term,” Abu Basha said.

Elsewhere, Al-Hammoury said the global markets, in general, witnessed a difficult year due to the economic fluctuations and geopolitics. “I think we may be very close to rock bottom,” he noted.

"The shift in the current downward trend may come via central banks, especially if they decide to ease the tightening of the current policies due to the economic slowdown and potential recession, he stated, expecting the markets to stabilize soon.

Meanwhile, Saleem stressed that high-interest rates and inflation impact financial assets, expecting the Kingdom’s financial assets to remain under pressure. In the case of lack of general global demand, all assets are likely to witness a correction with the re-pricing of valuations at a higher rate.

Global economy heading into recession

Abu Basha highlighted the high risks of the recession in light of the apparent determination of the US central bank to control inflation, in addition to the turmoil in Europe as a result of the Russian-Ukrainian war and fears about energy supplies, especially during the coming winter.

Al-Hammoury said the global economy has been in recession since the first day of the Russian-Ukrainian war, noting that the statement of several experts about the strength of the global economy is surprising.

"Whoever looks at numbers and tries to ‘glorify’ them for one reason or another does not know how bad the current situation is and the impact of the war will not only have a short-term effect, but will last for years, even if the war ends tomorrow," he noted.

"It is funny that the US, for example, considers that the economy has not entered a stage of recession despite the contraction in GDP for two consecutive quarters,” Al-Hammoury said, considering that this is due to political motives, with the approach of the US mid-term elections in November.

On the other hand, Saleem said it is difficult to expect the economic recession at present. However, the current scenario represents a very good model for the global economic recession.

In light of unemployment rates in the US that hit record lows, everyone expects the economy to enter into a stage of recession, Saleem said, noting that all other indicators point to sharp declines in all markets worldwide.