UBS CEO says investors expect aggressive Fed cuts 'way ahead of the curve'

The CEO of Swiss banking giant UBS said on Thursday that the fight against inflation is far from over, and some investors seem to be getting ahead of themselves on expectations that the US Federal Reserve may make an aggressive rate cut this month.

“I think the market is a little bit 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 cut rates at the end of its next policy meeting on September 18 has been answered. The only question that remains is: by how much.

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

Data released on Wednesday showed that the core US consumer price index, which excludes volatile food and energy prices, rose 0.3% in August, slightly above forecasts for a 0.2% increase.

Although the broad CPI, a broad measure of the cost of goods and services across the US economy, rose 0.2% for the month of August, the uptick in the core CPI could reduce the likelihood of the Fed cutting interest rates when policymakers meet next week.

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

According to CME Group's FedWatch tool, traders are pricing in about an 85% chance of a 25 bps rate cut in September, with 15% still pricing in a 50 bps cut. A basis point is 0.01 percentage point.

The Fed's benchmark borrowing rate, which affects a large portion of other rates paid to consumers, is currently 5.25%-5.50%.

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

“There is a lot of stickiness on the inflation side, but consumers are holding up pretty well,” he said. “But I would say for now, the outlook is pretty consistent with a soft landing, and so we're kind of positive on the situation.”

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

Despite China's gloomy economic outlook, Ermotti doubled down on the bank's commitment to the country and the opportunities it offers. “We have been in China for over 50 years, and we will be there for the next hundred, 200 years,” he said.

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

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