Lower rates a bigger risk for bank equities than for bonds

In his headlining speech at the Jackson Hole Economic Symposium, Federal Reserve (Fed) chair Jerome Powell’s message to the market was clear.

It feels as though market news hasn’t taken a holiday so far this summer. From the US on Wednesday we got the minutes of the Federal Reserve’s (Fed) July 30-31 policy meeting, and revisions to a whole year of non-farm payrolls (NFP) data from the Bureau of Labour Statistics (BLS).

The title of this year’s Jackson Hole Economic Symposium – essentially a short holiday camp for the world’s economists and central bankers – is “Reassessing the effectiveness and transmission of monetary policy”, an important question given the remarkable resilience developed market economies have shown to the sharpest interest rate hiking cycle we have seen in four decades.

When the Bank of England (BoE) cut interest rates for the first time in four years earlier this month, we thought the move – made on a knife-edge 5-4 vote – had come a little too early.

Recent US Consumer Price Index (CPI) inflation data brought good news for investors and central banks.

Market attention in the government bond market has rapidly turned from central banks holding rates “higher for longer” to the potential for “lower and sooner".

Headlines have painted a nervous picture of the health of consumers across Europe. Simultaneously, rating agencies have upgraded their outlook on the same consumer assets to neutral. The short story is that, although there has been a mild weakening in performance metrics, the consumer has held up well and is ahead of our base case expectations in almost all areas.

Julius Baer announced a call of its $300m Additional Tier 1 (AT1) instrument. The bond had a coupon of 4.75%, and if not called it would switch to a new coupon of five-year Treasury yield plus 284 basis points (bps), so about 6.7% at the moment.

We are coming towards the end of the reporting cycle for European banks for the first half of 2024. Unlike other quarterly reports, mid-year results are particularly useful in our view. They confirm the trends that we have already seen in the first half of the year, and thus validate or indeed put into question, the outlook that the management teams laid out for the full fiscal year.