Investors expecting an aggressive Fed cut are getting too ‘ahead of the curve,’ UBS CEO says

The CEO of Swiss banking giant UBS said Thursday that the fight against inflation isn’t over yet, and some investors seem to be getting too ahead of themselves in expecting that the U.S. Federal Reserve could pull an aggressive rate cut this month.

“I think the market seems to be a little bit too ahead of the curve in expecting the Fed to go so aggressively,”  Sergio Ermotti, Group CEO of UBS Group AG, told CNBC’s “Squawk Box Asia.”

The question of whether the Fed will lower rates at the end of its next policy meeting September 18 has largely been answered. The only question that remains is: by how much.

The “most important” issue that the Fed needs consider is still inflation, which remains sticky and not yet “totally under control,” Ermotti added.

Data released Wednesday showed that the core U.S. consumer price index, which excludes volatile food and energy prices, increased 0.3% for the month of August, slightly higher than forecasts of a 0.2% climb. 

While the wider CPI, a broad measure of goods and services costs across the U.S. economy, rose 0.2% for the month of August, the uptick in core CPI may undercut the chances of an outsized interest rate cut by the Fed when policymakers meet next week. 

“I would say probably a cut, but not as the market expects,” Ermotti said. 

While traders are pricing in around an 85% chance of a 25 bps rate reduction in September, 15% are still pricing in a 50 bps lowering, according to the CME Group’s FedWatch Tool. A basis point is 0.01 percentage point.

The Fed’s benchmark borrowing rate, which influences a bulk of other rates that consumers pay, is currently at 5.25%-5.50%.

A long-awaited soft landing could still be managed, Ermotti said, adding that other economic data still appear to point to such a scenario.

“There is a lot of stickiness in part of the inflation, but consumers are holding up pretty well,” he said. “But I would say for the time being, the outlook is pretty consistent with a soft landing, and so we remain somehow positive on the situation.”

Ermotti also shared his optimism on Asia, saying while UBS sees “very good momentum” in the region’s growth, the region is not immune from challenges posed by geopolitics and the wider global economic outlook. 

Despite China’s gloomy economic outlook, Ermotti doubled down on the bank’s commitments in the country and the opportunities it offers. “We have been in China for more than 50 years, and we’re going to be there for the next hundred, 200 years,” he said.

Last month, UBS shattered profit expectations for the second quarter, reporting $1.136 billion in net profit attributable to shareholders, amid cost-cutting measures as well as increasing revenue from its global wealth management and investment banking units. The company-compiled consensus forecast was $528 million.

“The two real opportunities and engine of growth for us are still the U.S. and Asia, broadly speaking, and China is a major driver of that,” Ermotti said.