A Fed rate hike is coming into view. Here’s what UBS says to own — and avoid
August’s surprisingly strong U.S. jobs print has sharply increased the odds of a September Fed rate hike — offering investors a chance to buy equities, take advantage of opportunities in longer-dated bond yields and build gold hedges, according to UBS . The Federal Reserve could be set to raise interest rates after U.S. nonfarm payrolls surged by 162,000 last month, exceeding consensus forecasts of 55,000, as unemployment held steady at 4.1%. Following August’s jobs report — the strongest monthly total since March — traders were pricing in roughly a 60% chance of a quarter-point hike when the Federal Open Market Committee meets September 15-16. Any market volatility linked to a rate hike could provide investors with an opportunity to put Fed Chair Kevin Warsh’s mantra to “watch the ball, not the referee” into action, UBS said Monday. US30Y 3M mountain U.S. 30-year Treasurys. “This could include, for example, buying potential dips in equities (provided earnings prospects remain strong), taking advantage of elevated medium-to long duration quality bond yields, reducing excess dollar holdings on strength, or using dips in gold to build a longer-term portfolio hedge,” strategists led by Mark Haefele, global wealth management chief investment officer at UBS Switzerland, noted. A rate hike accompanied by slower-than-desired progress on disinflation but solid economic growth has different portfolio implications than one accompanied by persistent inflation coupled with sluggish growth, UBS said. “A Fed responding to U.S. economic strength is very different from a Fed responding to inflation problems. For portfolios, that distinction matters far more than the next policy meeting,” analysts said, adding that August’s positive labor data points to the first, comparatively more constructive outcome. Equities UBS remains positive on global equities. While higher yields could spark short-term volatility, weighing on rate-sensitive areas, strategists said even additional tightening would not necessarily outweigh its more important medium-term equity drivers: AI-related capex spending, resilient economic activity, and broad earnings growth. .SPX YTD mountain S & P 500. “We continue to position for the upside in equities and continue to favor AI, power and resources, and longevity, all of which should benefit from stronger investment, productivity gains, and structural growth,” UBS said. Bonds In government bonds, further upward repricing of the policy path could weigh on returns and limit capital-gain potential, particularly at the shorter end of the yield curve, UBS warned. “We would no longer recommend that investors lock in yields in short- to medium-duration bonds as an alternative to cash,” analysts wrote. Instead, they said opportunities could be opening up in the medium-to-longer part of the yield curve, in light of recent moves higher in yields, which offer income and diversification benefits for portfolios. “This part of the market may ultimately benefit if Fed tightening reinforces confidence in the central bank’s inflation commitment, reduces longer-term inflation expectations, or slows GDP growth,” analysts said. U.S. dollar A hawkish turn by the Fed would help support the greenback, particularly if a divergence with other central banks grows wider. @DX.1 YTD mountain Dollar index. “Tightening amid strong growth could sustain the U.S. dollar for longer through stronger capital flows and relative economic performance,” UBS said. “In contrast, inflation-led tightening alongside weaker growth would present a more mixed outlook, as higher yields may start to compete with concerns about fiscal sustainability and the longer-term economic outlook.” Gold Higher real rates, coupled with a stronger U.S. dollar, pose near-term headwinds for gold. But those headwinds could be offset by persistent inflation, geopolitical uncertainty, and ongoing concerns over fiscal and monetary credibility — bolstering bullion’s safe haven status. @GC.1 YTD mountain Gold futures. “We currently view gold more as a portfolio hedge and diversifier, rather than as a tactical expression of the next Fed decision,” analysts said. “More broadly, commodities can potentially provide both a structural source of return and diversification in scenarios where energy disruption or renewed inflation challenges equities and bonds. Electrification, rising power demand, AI infrastructure investment, and constrained supply support the longer-term outlook for the asset class.”
Source – CNBC
