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MAY 9, 2023

PREDICTIONS ON FEWER FED RATE CUTS

Based on past events, Goldman Sachs and Barclays believe that the Federal Reserve will not be as aggressive in cutting interest rates this year as expected. Goldman Sachs notes that Fed easing cycles tend to be short, with interest rate cuts typically lasting six months. Meanwhile, Barclays highlights that the Fed has a pattern of behavior regarding interest rates, which suggests that the central bank will likely remain steady. Furthermore, both banks advise focusing on the Fed’s decisions in December instead to get a better idea of future rate cuts.

SHORT-TERM TREASURY BILLS

Bill Gross, former chief investment officer of Pacific Investment Management, believes that the current U.S. debt-ceiling issue is a temporary problem that will soon be resolved. He recommends buying one to two-month Treasury bills, which provide higher interest rates than longer-term bonds. Gross acknowledges that short-term interest rates have soared due to uncertainty over Congress’ actions, but he is still confident that this will only be temporary as these types of issues have occurred in the past, and they have always been resolved in the end.

BONUS GAP

Wall Street’s bonus season is expected to show a gap between large and smaller banks. According to a report by Johnson Associates Inc., while bankers at larger banks could see a rise in incentive pay of up to 20%, bankers at regional banks may face a decline of up to 20%. This is because regional banks are suffering from a flood of withdrawals and stock drops as shareholders fear that rising rates are harming the value of the banks’ assets. Consequently, bankers who advise on mergers and acquisitions may see their bonuses fall by 20%, while debt underwriting counterparts may receive a 5% to 10% increase in their incentive pay.

OIL PRICES FELL

Oil prices fell after a two-day increase due to concerns about China’s economic recovery and energy demand. West Texas Intermediate decreased to about $72 per barrel following an almost 7% increase in the past two sessions. Last month’s decrease in imports in China contributed to the fall, which has led to a wider market decline.

INTERNATIONAL NEWS

In order to fight inflation, the European Central Bank (ECB) has been gradually increasing interest rates. However, despite efforts, it is likely that the ECB will need to maintain high rates for longer than originally planned. ECB plans to continue monitoring wage growth, profit margins, and other economic indicators, as well as re-evaluating the effectiveness of the interest rate hikes in September to determine if inflation is starting to decrease.

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