Jerome Powell

4 ETFs to buy to ride the FED rate cut

The most important question for the Federal Reserve's monetary policy meeting on Wednesday, January 31 is what kind of "smoke signals" Fed Chair Jerome Powell will send to financial markets around the world, i.e.
any signals about the possibility of a cut interest rates at the next central bank meeting in March.
Fed officials are not expected to make any changes to rates at their Jan.
30-31 meeting, but will use the discussion to line up their views with rationales for future monetary easing.
I'm reading a lot of comments these days, and even Steve Liesman of CNBC, an authoritative commentator and very familiar with the FED Board of Governors, agrees that Powell will leave the door open for a move as early as March, but officials will not decide to explicitly announce already now, in one way or another, the future moves…
because the meeting is two months away and many more macro-economic data could always change the growth scenario of the USA.
Right now, if we look at FED Funds futures, the markets are pricing in a 50% chance of a cut in March.
The latest data regarding GDP and the PCE deflator signal robust growth but with moderate inflation.
An optimal scenario for both bond and stock markets.
If there is growth, there are consumption and investments, and therefore more corporate profits and therefore the bull market of the US stock sector is guaranteed for 2024.
If inflation moderates further, it means that even in the bond market it is possible trigger a rally in treasury prices with a fall in long-term interest rates and softer conditions for the financing of families and businesses.
A drop in mortgage interest rates would be a great shot in the arm for the US real estate sector.
Go and look right now at an ETF that invests in the main companies in the American real estate sector, which is Invesco US Real Estate Sector UCITS ETF (ISIN: IE00BYM8JD58 – Ticker: XRES).
It tracks the S&P Select Sector Capped 20% Real Estate index.
The S&P Select Sector Capped 20% Real Estate index also tracks the US real estate sector.
The weight of individual shares can be a maximum of 20%: it is a small ETF with managed assets of 80 million euros).
Also for the US real estate sector, an excellent alternative ETF is the iShares US Property Yield UCITS ETF (ISIN: IE00B1FZSF77 Ticker: IUSP).
This second ETF is very large: total assets are more than 500 million euros and the number of ETF components is more than 90.
But let's get back to talking about the FED.
With his press conference speech tomorrow, January 31, Powell will essentially end the tightening cycle that began in March 2022 after the explosion of inflation that began the previous year, in 2021.
Since then, the central bank has increased the rate of reference from near zero to a range of 5.25% to 5.5%.
In light of the recent US data, as mentioned above, Powell will therefore be able to announce the positive turn to the economic outlook and talk about the possibilities of continued economic growth with lower inflation and that soft landing in the pace of GDP growth , long sought after by the Board of Governors.
But there are some tough questions for the Fed: What will be the best pace of rate cuts? Cuts of 25 bps or 50bps each? When will they finish? Summer of 2025? What matters now is that the Fed has a clear reason to cut rates: High rates are no longer necessary given the progress it has made in reducing inflation since last summer.
Go and look at the Bloomberg graph at the end of the article, which shows how the FED increases in 2022-2023 have finally caused a decline in the CPI inflation rate in the last 6 months.
Core inflation – excluding energy and food – is now at an annual rate of 2.9%, the lowest rate since March 2021.
The battle to bring inflation back to 2% has been almost won, and perhaps completely won… A Another reason to lower rates is that the Fed does not want financial conditions so restrictive that they risk needlessly causing a recession.
There is the feeling that the members of the Board want to avoid – in the year of the presidential elections – putting the economy through a recession it doesn't need, with the "excuse" of controlling inflation.
So let's prepare for a Treasury rally.
On the US bond rally, I recommend an ETF on Treasuries in the extra-long range of the rate curve (20 years and beyond) which is the bond range that would benefit most from the price rally in the event of a reduction in FED rates.
However, it must be an ETF protected from the devaluation of the dollar against the euro.
A weak dollar, up to the 1.12-1.15 area, is a real risk when the FED starts to really lower rates, because the yield differential between the US overnight and the EURO overnight will reduce.
An interesting opportunity is therefore represented by iShares USD Treasury Bond 20+yr EUR Hedged UCITS ETF (ISIN: IE00BD8PGZ49 – Ticker: IUSV).
It tracks the ICE US Treasury 20+ Year (EUR Hedged) index.
The ICE US Treasury 20+ Year (EUR Hedged) in turn tracks US dollar-denominated government bonds issued by the US Treasury with more than 20 years of residual life.
It is an ETF with currency hedging in Euro (EUR) which therefore bets on the appreciation of very long duration bonds but without exchange rate risk: it is a very large ETF with managed assets of 1,268 million Euros.
If you instead want to bet taking less duration risk then the ideal option is Vanguard USD Treasury Bond UCITS ETF EUR Hedged Accumulating (ISIN: IE00BMX0B631 – Ticker: VDTE).
Invests in Treasury securities with an average of 8-12 years and with accumulation of proceeds (edole).
This ETF manages assets equal to 461 million euros and is also covered by exchange rate risk, therefore by the risk of devaluation of the dollar against the euro.
But let's get back to the FED: the most difficult questions economists ask are the pace of rate cuts and where to stop.
Many of them expect March as the date of the first cut, but there are many who believe that FED officials are "sinning for patience" before an initial rate cut, which therefore may not occur in March but close to the summer (May).
The strong growth rate in the fourth quarter and stronger consumer sentiment suggest it could be a “bumper than expected” rate-lowering path for inflation to finally reach 2% over time.
In his press conference tomorrow, Jan.
31, Powell will likely echo comments from Fed Governor Christopher Waller, who said that rate cuts “can and should be brought down methodically and carefully.” Therefore, in the case of a first rate cut delayed until May, we will need to have a little patience before the treasury and real estate ETFs bear fruit in terms of capital gains.
What about any changes to the quantitative restriction program? That is, what about the decrease in assets on the balance sheet? Economists are in fact also focused on what the Fed will say about its policy of reducing the balance sheet, which rose to 9 billion dollars at its highest peak from 4.2 trillion dollars in 2019.
Until now, the Fed has allowed that about $76 billion a month in maturing bonds were being wiped off its balance sheet by simply not rolling them over.
The FED will probably continue with the QT (quantitative tightening) program but more gradually.
A slower roll-off pace means that the Fed will have to purchase fewer Treasury securities for maturing ones, but with a ratio of renewed securities/expired securities higher than that which existed until December last year…
and a little ' closer to the numeric factor 1…
which is a dovish message for the market, especially in terms of price volatility.
In conclusion: 2024 will be a positive year for the equity sector, and above all for the US real estate sector, but also for the bond market.
Preparing now with the appropriate ETF could give you satisfaction at the end of 2024.
Always within the scope of diversification of your portfolio, and consistently with your risk profile.
|DISCLAIMER The information and considerations contained in this article should not be used as the sole or principal basis on which to make investment decisions.
The reader retains full freedom in his own investment choices and full responsibility in making them, since he alone knows his risk propensity and his time horizon.
The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public for savings.| read also Piazza Affari, this stock can rise by 60% according to Barclays

Author: Hermes A.I.

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