The Federal Reserve’s rate decision on Wednesday is keeping investors on edge, but there’s a bigger question looming: what will Japan’s central bank do on Friday? Thomas Hayes, Managing Member of Great Hill Capital, believes the Bank of Japan’s (BoJ) decision could be even more impactful than the Fed’s, potentially triggering further market volatility.
Hayes points out that past rate hikes by the BoJ, particularly in the tech sector, have caused significant market fluctuations. He argues that the Fed should have cut rates back in August, but instead, the BoJ hiked, creating a liquidity mismatch that led to a sharp sell-off in the ‘Magnificent Seven’ tech stocks. He predicts that if the BoJ hikes rates again on Friday while the Fed only cuts by 25 basis points, we could see even more turbulence in the market.
However, Hayes believes the situation could be stabilized if the Fed cuts by 50 basis points while the BoJ hikes by 25 basis points, or if the BoJ maintains its current rate and the Fed cuts by 25 basis points. He recalls that while past Fed cuts of 50 basis points, such as in March 2020, proved effective, cuts in September 2007 and January 2001 had less favorable outcomes.
While Fed Fund Futures suggest a 65% chance of a 50 basis-point cut, Hayes remains cautious. He argues that such a large cut could suggest the Fed is falling behind and could also be perceived as politically motivated, something the Fed is likely to avoid. Hayes believes that with the effective federal funds rate (EFFR) currently at 5.33%, over 230 basis points above inflation, monetary policy is already too restrictive.
Despite these concerns, Hayes expects the Fed to go with a 25 basis-point cut accompanied by dovish commentary, hinting at further cuts in November and December. Although the market is pricing in 100-125 basis points of cuts by year-end, Hayes predicts a more moderate reduction of 75-100 basis points.
He highlights stronger-than-expected growth, with Q3 GDPNow estimates at 2.5% and a 15% earnings per share (EPS) growth forecast for 2024. He believes, “Hard to have a recession with GDP growing over 2%.”
While Hayes is not repositioning his portfolio ahead of the rate cuts, other major funds made significant moves in the second quarter anticipating the rate-cut cycle. According to HedgeFollow, Berkshire Hathaway sold more Apple Inc. AAPL shares, State Street bought Nvidia Corp. NVDA shares, Coatue picked up Nvidia and Dell Technologies DELL, and Two Sigma bought CME Group Inc. CME shares.
