We still think a 25bp rise by the Fed this month is quite likely – Credit Suisse

By Senad Karaahmetovic

While Credit Suisse analysts believe that the Silicon Valley Bank (NASDAQ:) collapse doesn’t pose a systemic risk, they warn that the market seems too optimistic on rates.

“We struggle to justify market expectations of a 4.4% rate in 6 months’ time (this was 5.7% just a week ago) unless overall financial conditions tighten much more (and so far they have only marginally tightened),” analysts wrote in a client note.

“The yield curve, conventional lead indicators, the stickiness of service sector inflation and abnormally large lags suggest to us that there is still a very high risk of recession by Q1 24: something that is not priced adequately into high yield spreads.”

Along these lines, analysts think that a by the Fed this month is quite likely. All in all, they urge the bank’s clients to stay cautious as far as U.S. equities are concerned

“We still see c10% EPS risk (owing to both a margin and revenue squeeze), the ERP is 5.1% versus a warranted 5.6% (we continue to believe fair value P/E is 16x), excess liquidity is still falling by record amounts and even now risk appetite is still discounting a strong recovery.”

If indeed the Fed cuts in June, as the market is pricing in now, Analysts remind investors that “the market has always been down sharply 6 months after the first rate cut.”

Finally, they advised investors to be underweight non-financial cyclicals.

Source link