Credit Suisse on Friday downgraded global equities to "benchmark" rating from "overweight," citing the need for the U.S. Federal Reserve to raise interest rates above market expectations amid higher wage growth in the United States.
The brokerage, which cut its rating on global equities for the first time since the peak of the pandemic, said the Fed rates need to be at 1.7 percent for 2022, in line with market estimates. By the end of 2023 it sees the need for the rates to be at 2.5 percent, which is above market expectations.
"The Fed has met its twin targets of maximum employment and 2 percent average core PCE [Personal Consumption Expenditures], hence policy should be neutral," Credit Suisse Analyst Andrew Garthwaite said.
He also expects the output gap to have fully closed by the end of 2022, and hence monetary conditions should be "at least neutral."
Garthwaite also argued that the most critical issue for global markets is U.S. wage growth, which is "too high," being 75 basis points above levels that would be consistent with the Fed's inflation target.
"The reliable lead indicators of U.S. wage growth are not yet falling. If wages were to stay at current levels until May, the Fed would have to quickly slow GDP growth to below trend at whatever rates that are required," CS said.
On Thursday, St. Louis Federal Reserve Bank President James Bullard said that he has become "dramatically" more hawkish in light of the hottest inflation in nearly 40 years, and he now wants a full percentage point of interest rate hikes by July 1.