1 00:00:00,080 --> 00:00:01,920 Speaker 1: Let's get to Dan Girard, who's with us for the 2 00:00:01,960 --> 00:00:05,120 Speaker 1: half hour. Dan is the senior multi asset strategist at 3 00:00:05,160 --> 00:00:09,440 Speaker 1: State Street. He happens to be on the line from Bogata, Columbia. Dan, 4 00:00:09,480 --> 00:00:11,800 Speaker 1: thanks for being with us. The focus is on this 5 00:00:11,880 --> 00:00:14,840 Speaker 1: hot reading that we had on the US retail inflation. 6 00:00:15,400 --> 00:00:17,840 Speaker 1: The FED is clearly behind the curve here and they 7 00:00:17,880 --> 00:00:20,840 Speaker 1: have adopted very very hawkish language to try to get 8 00:00:20,880 --> 00:00:24,200 Speaker 1: the market in line. How much more downside risk is 9 00:00:24,239 --> 00:00:27,520 Speaker 1: there right now for the equity space? Oh, I think 10 00:00:27,600 --> 00:00:31,440 Speaker 1: quite a bit. And I think that what's actually fascinating 11 00:00:31,440 --> 00:00:34,680 Speaker 1: about this is that the market really isn't listening. I've 12 00:00:34,720 --> 00:00:36,840 Speaker 1: been thinking this for a little while that we've had 13 00:00:37,520 --> 00:00:39,680 Speaker 1: all the pieces of the puzzle come together here. We 14 00:00:39,760 --> 00:00:44,159 Speaker 1: had FED minutes which explicitly said that inflation could be 15 00:00:44,240 --> 00:00:47,360 Speaker 1: entrenched if the public questions their resolve of the committee. 16 00:00:47,760 --> 00:00:50,239 Speaker 1: And then we had jobs numbers that were blistering, And 17 00:00:50,280 --> 00:00:54,480 Speaker 1: now we've got inflation numbers that really show this is entrenched, 18 00:00:54,840 --> 00:00:57,160 Speaker 1: and the market still is sort of thinking this is 19 00:00:57,200 --> 00:00:59,880 Speaker 1: a race to neutral or a little bit above new 20 00:01:00,120 --> 00:01:03,400 Speaker 1: role um kind of of a play here. This isn't 21 00:01:03,440 --> 00:01:06,280 Speaker 1: FED speak. The feed is telling us now directly that 22 00:01:06,400 --> 00:01:12,000 Speaker 1: they will march higher um, well into the restrictive zone 23 00:01:12,080 --> 00:01:14,800 Speaker 1: to try to get prices under control. And let's keep 24 00:01:14,840 --> 00:01:17,479 Speaker 1: in mind the rates are still a comminative in this 25 00:01:17,520 --> 00:01:20,840 Speaker 1: period where we're seeing some of the largest inflation of 26 00:01:20,840 --> 00:01:27,720 Speaker 1: our generation. Fundamentally, Danniel will will that policy work. It's 27 00:01:27,760 --> 00:01:30,360 Speaker 1: going to be really hard, um. And this is the problem. 28 00:01:30,400 --> 00:01:34,480 Speaker 1: This isn't monetary. This you know, a complete something in 29 00:01:34,480 --> 00:01:38,280 Speaker 1: the control of monetary policy. Because of this COVID position, 30 00:01:38,280 --> 00:01:40,680 Speaker 1: we're in supply chain issues where we're coming from the 31 00:01:40,760 --> 00:01:44,040 Speaker 1: floor off the bottom of zero rates. UM. This is 32 00:01:44,040 --> 00:01:46,200 Speaker 1: going to be very difficult, and the only way they 33 00:01:46,200 --> 00:01:50,200 Speaker 1: can do it is by significantly impacting the jobs market 34 00:01:50,720 --> 00:01:56,200 Speaker 1: or significantly impacting demand much much more than they're going 35 00:01:56,240 --> 00:01:58,560 Speaker 1: to be able to with rates in these kind of positions. 36 00:01:58,560 --> 00:02:02,040 Speaker 1: So when you hear something like mild recession that you're 37 00:02:02,120 --> 00:02:04,880 Speaker 1: going to adamantly disagree with that that it's going to 38 00:02:04,960 --> 00:02:08,639 Speaker 1: be much more severe, UM, I think that they're going 39 00:02:08,720 --> 00:02:12,519 Speaker 1: to have to try. UM. Maybe to put that in perspective, 40 00:02:12,880 --> 00:02:16,200 Speaker 1: it's not about the recession. It is about how they're 41 00:02:16,240 --> 00:02:19,040 Speaker 1: going to try to get inflation under control. By having 42 00:02:19,040 --> 00:02:22,480 Speaker 1: to bring demand way down or to loosen this job's 43 00:02:22,480 --> 00:02:24,880 Speaker 1: market up quite a bit. If we think that they 44 00:02:25,000 --> 00:02:28,200 Speaker 1: need to get to five percent unemployment UM and that's 45 00:02:28,200 --> 00:02:31,359 Speaker 1: still within their mandate a full employment under NAHRU, then 46 00:02:31,520 --> 00:02:36,640 Speaker 1: that's something like two million jobs added UH a looser 47 00:02:36,680 --> 00:02:39,240 Speaker 1: which could come through participation, or it could come through 48 00:02:39,520 --> 00:02:42,520 Speaker 1: job losses or somewhere in between. And that's a big 49 00:02:42,600 --> 00:02:47,480 Speaker 1: number considering where participation already is with with prime earners. 50 00:02:47,720 --> 00:02:49,800 Speaker 1: You know, we I don't think anyone expects we're going 51 00:02:49,840 --> 00:02:52,600 Speaker 1: to get the fifty plus crowd to uh you know, 52 00:02:52,639 --> 00:02:55,920 Speaker 1: post World War two participation levels in the economy. That 53 00:02:56,120 --> 00:02:58,560 Speaker 1: is going to be tough to achieve. And it's the 54 00:02:58,639 --> 00:03:01,880 Speaker 1: process that is going to be really the problem here 55 00:03:01,919 --> 00:03:05,080 Speaker 1: getting there talking about the Federal Reserve, does you know 56 00:03:05,200 --> 00:03:10,560 Speaker 1: this very tight labor market at the moment, then really 57 00:03:10,600 --> 00:03:14,880 Speaker 1: give the Federal Reserve the license to really, really really 58 00:03:14,919 --> 00:03:18,960 Speaker 1: be aggressive. Yes. And and this is I think a 59 00:03:19,040 --> 00:03:23,280 Speaker 1: point that UM bond investors or the markets are missing 60 00:03:23,320 --> 00:03:25,480 Speaker 1: a little bit, this idea that we're going to get 61 00:03:25,520 --> 00:03:30,120 Speaker 1: this UM curve in version and UM in the place 62 00:03:30,160 --> 00:03:32,000 Speaker 1: to be a longer duration right now. I don't think 63 00:03:32,000 --> 00:03:36,320 Speaker 1: that's the case right there, because the FED actually needs 64 00:03:36,320 --> 00:03:38,360 Speaker 1: to loosen up the labor market and actually has to 65 00:03:38,440 --> 00:03:42,680 Speaker 1: work towards slowing this economy. UM. The curbing version is 66 00:03:42,720 --> 00:03:46,400 Speaker 1: a is a an expect expression of expectations that the 67 00:03:46,400 --> 00:03:49,360 Speaker 1: FED will eventually have to cut into the downturn, which 68 00:03:49,400 --> 00:03:51,480 Speaker 1: I don't think they're going to shift to so soon. 69 00:03:52,320 --> 00:03:55,119 Speaker 1: That means that this labor market is really the key here. 70 00:03:55,200 --> 00:03:58,480 Speaker 1: They have got to get this thing looser somehow or another. 71 00:03:58,880 --> 00:04:01,200 Speaker 1: And that is going to mean that probably fixed income 72 00:04:01,760 --> 00:04:05,600 Speaker 1: UM is the biggest risk asset actually right now as 73 00:04:05,600 --> 00:04:10,680 Speaker 1: they work towards creating a weaker economy, and UH in 74 00:04:10,720 --> 00:04:13,080 Speaker 1: credit markets and rates markets adjust to that. So we 75 00:04:13,160 --> 00:04:16,760 Speaker 1: began the conversation by acknowledging downside risk for the equity space. 76 00:04:16,800 --> 00:04:18,800 Speaker 1: And if you're saying to me, now, hey, there's more 77 00:04:18,839 --> 00:04:22,520 Speaker 1: downside possible in the fixed income arena, where do you 78 00:04:22,560 --> 00:04:25,200 Speaker 1: put capital to work to derive any type of return 79 00:04:25,320 --> 00:04:28,640 Speaker 1: right now? Yeah? It's it's not an easy one, is it. 80 00:04:29,120 --> 00:04:33,839 Speaker 1: I think that the place to be is in inflation sensitivity. 81 00:04:33,960 --> 00:04:37,359 Speaker 1: Right now, we know that China is going to try 82 00:04:37,400 --> 00:04:41,320 Speaker 1: to UM control the downward growth expectations that are that 83 00:04:41,360 --> 00:04:44,520 Speaker 1: are coming into this COVID policy. So this new credit 84 00:04:44,600 --> 00:04:47,440 Speaker 1: expansion of this idea that they're going to have to 85 00:04:47,440 --> 00:04:50,760 Speaker 1: stabilize their property markets and go to their traditional playbook 86 00:04:50,839 --> 00:04:54,159 Speaker 1: of infrastructure build. Along with the fact that the US 87 00:04:54,200 --> 00:04:57,080 Speaker 1: housing situation that we have right now is just as 88 00:04:57,160 --> 00:04:59,880 Speaker 1: much supply as it is demand, means that I think 89 00:05:00,320 --> 00:05:04,120 Speaker 1: the pressure on based materials. Materials in this inflation sensitive 90 00:05:04,200 --> 00:05:06,800 Speaker 1: environment is actually the place to be, whether that's through 91 00:05:06,839 --> 00:05:10,080 Speaker 1: the equity markets, um even in energy in places and energy, 92 00:05:10,640 --> 00:05:13,800 Speaker 1: or through commodities themselves is probably your best bet for now. 93 00:05:14,560 --> 00:05:19,000 Speaker 1: Balance that with some really solid defensive companies that have 94 00:05:19,080 --> 00:05:22,719 Speaker 1: global pricing power and healthcare. And healthcare I think is 95 00:05:22,720 --> 00:05:25,720 Speaker 1: the one the anti cyclical area that actually benefits from 96 00:05:25,760 --> 00:05:28,400 Speaker 1: all this with the aging population and with the with 97 00:05:28,440 --> 00:05:30,039 Speaker 1: the M and A that will happen in this space 98 00:05:30,080 --> 00:05:35,880 Speaker 1: for efficiency and earnings starting off of course Thursday, US time, 99 00:05:36,440 --> 00:05:39,320 Speaker 1: these banks are coming up probably not so great to 100 00:05:39,320 --> 00:05:41,320 Speaker 1: look at those, but other companies forward guidance is going 101 00:05:41,360 --> 00:05:45,040 Speaker 1: to be absolutely vital, that's right, and I think earnings 102 00:05:45,080 --> 00:05:48,160 Speaker 1: is actually gonna hold up quite well. Um, the banks, 103 00:05:48,480 --> 00:05:51,240 Speaker 1: especially the ones with trading revenue, will actually appear to 104 00:05:51,240 --> 00:05:53,040 Speaker 1: do quite well. I'm not sure investors will pay up 105 00:05:53,040 --> 00:05:57,240 Speaker 1: for that. Trading revenue, UM, lending revenue will be challenged. 106 00:05:57,480 --> 00:05:59,680 Speaker 1: But it's really the guidance and that's right, it's how 107 00:05:59,760 --> 00:06:01,640 Speaker 1: much are they going to try to kitchen sink this 108 00:06:01,800 --> 00:06:05,279 Speaker 1: here and try to get people's expectations lower given the 109 00:06:05,320 --> 00:06:08,800 Speaker 1: fact that they know what's coming a tougher environment ahead. Um, 110 00:06:08,880 --> 00:06:11,440 Speaker 1: it's gonna be one to watch. I think that Q 111 00:06:11,640 --> 00:06:14,640 Speaker 1: two does just fine. Uh. And really we start to 112 00:06:14,640 --> 00:06:18,920 Speaker 1: see the Q three guidance come down and analysts put 113 00:06:18,920 --> 00:06:21,640 Speaker 1: in hope for Q four in the holiday season. Uh, 114 00:06:21,839 --> 00:06:24,200 Speaker 1: and that's going to be really where the risk lies 115 00:06:24,279 --> 00:06:26,440 Speaker 1: is if we get those those earnings that come in 116 00:06:26,480 --> 00:06:28,400 Speaker 1: through through Q four, which we'll find out about in 117 00:06:28,400 --> 00:06:31,400 Speaker 1: early twenty three. So tighter policy when it comes to 118 00:06:31,880 --> 00:06:34,680 Speaker 1: the FED has generated a lot of dollars strength here, 119 00:06:34,680 --> 00:06:37,520 Speaker 1: and I think the consensus is this has created quite 120 00:06:37,520 --> 00:06:40,479 Speaker 1: the headwind from multinational firms. Is there a way to 121 00:06:40,680 --> 00:06:43,760 Speaker 1: kind of protect yourself in some way from from a 122 00:06:43,839 --> 00:06:47,440 Speaker 1: lot of the dollar strength that we have seen? Um, 123 00:06:47,480 --> 00:06:50,800 Speaker 1: the dollar strength is going to continue, and um, you 124 00:06:50,839 --> 00:06:53,560 Speaker 1: know it's just going to be it's it's those those 125 00:06:53,600 --> 00:06:56,640 Speaker 1: assets that are going to be looking for the relative 126 00:06:56,640 --> 00:07:00,160 Speaker 1: safety of the US through the better profitability of US. 127 00:07:00,320 --> 00:07:02,479 Speaker 1: And it's really the emerging markets that are going to 128 00:07:03,080 --> 00:07:05,080 Speaker 1: in some ways pay the price here is they have 129 00:07:05,279 --> 00:07:10,480 Speaker 1: to really balance this conundrum of inflation versus growth. Um 130 00:07:10,560 --> 00:07:12,840 Speaker 1: they've tried to get ahead of the situation for most 131 00:07:12,880 --> 00:07:16,280 Speaker 1: of let's say, most of Latin America, especially in Asia, 132 00:07:16,760 --> 00:07:18,760 Speaker 1: we've got countries that are still a bit behind the 133 00:07:18,760 --> 00:07:22,280 Speaker 1: curve and inflation, like Korea. They're going to have to 134 00:07:23,040 --> 00:07:26,520 Speaker 1: really work harder to get to get rates higher there 135 00:07:26,560 --> 00:07:29,320 Speaker 1: as well as growth starts to fade. So there's no 136 00:07:29,360 --> 00:07:31,480 Speaker 1: easy way, and I think that we need to really 137 00:07:31,480 --> 00:07:35,119 Speaker 1: continue to watch out for the emerging markets capital flow story, 138 00:07:35,560 --> 00:07:39,920 Speaker 1: especially as as the dollar keeps its strength. Thank you 139 00:07:40,040 --> 00:07:42,520 Speaker 1: so much for joining us down. That was Daniel Gerard, 140 00:07:42,960 --> 00:07:46,480 Speaker 1: senior multi asset Strateages at State Street getting the latest 141 00:07:46,520 --> 00:07:47,720 Speaker 1: on the markets.