Delusional UBS: Fed to Hike Twice in 2016, Buy Stocks, Sell Bonds

The CIO from UBS, Mark Haefele, believes we’re all a bunch of Nancies for buying bonds. He believes stocks will trade up, the Fed will jack rates twice, and that bonds will sell off.

Perhaps he took a few qualudes before penning this missive? Anything is possible, EXCEPT the notion that the Fed will hike twice in 2016, in an election year, whilst the economy is slowing and most of the western world is fucked and mired, mired and fucked, in a negative interest rate panorama of stupidity.

Despite the recent weak labor report, the Federal Reserve still appears on course to raise interest rates relatively soon. Economic data on jobs, wages, and inflation, as well as financial market conditions, will influence the Fed’s decision.
We think it is unlikely that the Fed will raise rates this month but we expect two rate hikes of a quarter percentage point each this – in September and December.

Federal Reserve Chair Janet Yellen recently clarified her thinking on the economy and the outlook for Fed policy following last Friday’s surprisingly weak labor report, which showed payroll growth in May slowing to its lowest level since 2010. While Yellen called this “concerning” and repeatedly noted the uncertainty in the economic outlook, overall she was cautiously optimistic. In our view, if the incoming data are reasonably good, then the Fed will be hiking rates in the not-too-distant future.

When thinking about monetary policy, it’s important to focus on the Fed’s dual mandate: maximum employment and price stability, where stability is defined as a 2-percent inflation rate. Yellen stated, “I believe we are now close to eliminating the slack that has weighed on the labor market since the recession,” and “I expect inflation to move back to 2 percent” as the impact of lower oil prices and the strong dollar fades. The big picture, then, is that the Fed is still on track to fulfilling its mandate.

A July hike is still possible if the economic data between now and the meeting are very strong. In either case, another hike should follow in December, as long as the economic recovery remains on track.

We recognize that Fed officials may struggle to communicate this without disrupting markets. Still, we believe risk assets can continue their recent improved performance. We maintain an overweight on U.S. equities, given our expectation for bottom-line growth to recover. We are underweight U.S. government bonds, which we expect to produce a modest negative return over the coming six months, as markets adjust to a somewhat faster pace of rate hikes by the Fed.