Warmongering comments from Federal Reserve officials and a hotter-than-expected August inflation report have weighed on stock markets in recent weeks as investors grapple with the prospect of higher and higher rate hikes. long even as recession concerns mount.

The Fed announced a third consecutive 75 basis point hike on Wednesday that took its federal funds rate to a range of 3% to 3.25%, the highest since the start of 2008. Projections from the meeting indicated that the Fed expects to raise rates by at least 1.25 percentage points in its two remaining meetings this year.

Speaking ahead of the Fed meeting, investment veteran Patrick Armstrong said the Fed is unlikely to sustain the rate hike indefinitely.

“I think the consensus probably got the Fed to hit 4.25% in March next year and then probably pause. It will depend as much on the US economy as it does on the outlook for inflation. the US is going to be on the cusp of a recession in early 2023 so it’s hard for me to see the Fed raising aggressively once it realizes that the US is just about in recession or very close to a recession,” Mr. Armstrong, who is chief investment officer at Plurimi Wealth, told CNBC’s “Squawk Box Europe” on Monday.

Mr. Armstrong is co-fund manager of Prosper Global Macro Fund, a diversified multi-asset fund with an inflation-fighting mandate. The fund was up 4.8% at the end of August, outperforming major indices in the US and Europe. The S&P 500 and Stoxx 600 were down about 20% and 15%, respectively, over the same period.

What’s in his wallet

Amid the uncertainty in stock markets, he thinks the biggest risk lies in the earnings outlook, which remains “far too optimistic”.

“We haven’t seen any significant downgrades despite overwhelming evidence of a really poor economic backdrop where consumer spending is really going to be hampered. Margins are going to be squeezed, and so is earnings per share,” he said. declared.

In this environment, the Prosper Global Macro fund took several short positions, as Mr. Armstrong is betting that the values ​​of these holdings will fall in the face of market volatility.

The fund’s largest short position is a 20% bet against 10-year Japanese government bonds.

“The Bank of Japan holds half of all outstanding bonds. They’re desperately trying to cap their interest rates at 0.25% as other central banks are aggressively rising… with a 40-year low, but you’re going to import inflation. I simply don’t see any realistic scenario in which the BOJ could maintain this 0% rate over 10 years. So I think it’s an amazing short right now,” he said.

Mr Armstrong was referring to the Bank of Japan’s yield curve control (YCC) policy – ​​a strategy that caps 10-year JGBs at around 0% and offers to buy an unlimited number of JGBs to defend a implicit ceiling of 0.25% around the target.

CNBC