Buying stocks hardly ever feels comfortable, and even less so when buying into an advanced rate-tightening cycle. Every solid data report you read leaves you feeling like you are sliding down the wall of rate worries we have been witnessing in past months.

Take last week’s US employment report: it was one of the messiest ever (revisions and funny items and what have you), but the headline figures were just too strong to be ignored. And this bites into the growing confidence that central banks will call it a day in their relentless tightening frenzy. So here we go again, repeating the point that policy mistakes remain the biggest risks for now, and this is despite all the geopolitical turmoil in the world.

Before the US job report last week, the Federal Reserve pointed in the right direction, with the chair acknowledging the easing of inflationary pressure. A ‘couple of hikes’ (smaller ones, and hopefully just one or two) would likely do. So two steps forward and one step back seems to be the pace for bourses for now. Hence, bottom-fishing – which is investment in stocks generally considered to be undervalued – remains the order of the day. We highlight technical-analysis signals this week in the growth space.

As to value investing, European financials and, in particular, banks can no longer be ignored given their major comeback in the past weeks. Yes, the space may look terribly overbought, but considering the payouts, the area very much reminds you of where US banks were ten years ago, i.e. showering investors with payouts until stock prices followed. See our ‘Number of the Week’ below for more insights.

The idea of buying European banks goes so much against the grain of investors that it is indeed one of the most promising trends for the 2023 stock-market vintage. In foreign exchange markets, climbing the wall of rate worries means spotting emerging market currencies with two features: high yields (as in European banks) and the prospects of a positive repricing in case the Fed stops tightening.

Central banks: More hawkish than you wish

As we know, the Fed and the ECB both raised their key interest rates last week, with financial markets continuing to expect an imminent end to policy tightening. At the same time, both the Fed and the ECB are reluctant to announce that they are going to stop tightening just yet.

The ECB has stressed that more needs to be done to bring inflation down. This is a clear indication of further rate hikes at the next meeting. We expect the ECB to raise rates again in March, slowing the pace to 0.25 percentage points after last week’s 0.5 percentage points hike. ECB President Christine Lagarde’s statement after last week’s decision suggests that she is aiming for another 0.5 percentage point hike.

The ECB seems to be paying too little attention to the decline in credit demand and credit activity that is already underway, as well as leading indicators of underlying inflationary pressures in the eurozone that have turned the corner.

At the same time, the ECB remains strongly focused on restoring its inflation-fighting credibility, which suffered a severe blow last year when the central bank completely failed to anticipate the inflation surge and adjust policy in a forward-looking manner. The strong focus on restoring credibility, combined with turning a blind eye to credit activity and early indicators of slowing inflation, increases the risk of the ECB making a policy mistake. Restoring its inflation-fighting credentials is also high on the agenda of a number of Fed officials, including Chairman Jerome Powell.

At the same time, the latest US labour market data points to a solid growth backdrop with more than 500,000 new jobs created. There are clear signs that inflation in the US has turned the corner and that the so far persistent inflation in services prices will ease in the coming months. Concurrently, the slowdown in US credit activity suggests that the current level of interest rates is already quite restrictive, making further rate hikes by the Fed unnecessary.