WEBVTT - Dan Gerard on the Markets (Radio)

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<v Speaker 1>Let's get to Dan Girard, who's with us for the

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<v Speaker 1>half hour. Dan is the senior multi asset strategist at

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<v Speaker 1>State Street. He happens to be on the line from Bogata, Columbia. Dan,

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<v Speaker 1>thanks for being with us. The focus is on this

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<v Speaker 1>hot reading that we had on the US retail inflation.

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<v Speaker 1>The FED is clearly behind the curve here and they

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<v Speaker 1>have adopted very very hawkish language to try to get

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<v Speaker 1>the market in line. How much more downside risk is

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<v Speaker 1>there right now for the equity space? Oh, I think

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<v Speaker 1>quite a bit. And I think that what's actually fascinating

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<v Speaker 1>about this is that the market really isn't listening. I've

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<v Speaker 1>been thinking this for a little while that we've had

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<v Speaker 1>all the pieces of the puzzle come together here. We

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<v Speaker 1>had FED minutes which explicitly said that inflation could be

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<v Speaker 1>entrenched if the public questions their resolve of the committee.

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<v Speaker 1>And then we had jobs numbers that were blistering, And

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<v Speaker 1>now we've got inflation numbers that really show this is entrenched,

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<v Speaker 1>and the market still is sort of thinking this is

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<v Speaker 1>a race to neutral or a little bit above new

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<v Speaker 1>role um kind of of a play here. This isn't

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<v Speaker 1>FED speak. The feed is telling us now directly that

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<v Speaker 1>they will march higher um, well into the restrictive zone

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<v Speaker 1>to try to get prices under control. And let's keep

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<v Speaker 1>in mind the rates are still a comminative in this

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<v Speaker 1>period where we're seeing some of the largest inflation of

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<v Speaker 1>our generation. Fundamentally, Danniel will will that policy work. It's

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<v Speaker 1>going to be really hard, um. And this is the problem.

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<v Speaker 1>This isn't monetary. This you know, a complete something in

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<v Speaker 1>the control of monetary policy. Because of this COVID position,

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<v Speaker 1>we're in supply chain issues where we're coming from the

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<v Speaker 1>floor off the bottom of zero rates. UM. This is

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<v Speaker 1>going to be very difficult, and the only way they

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<v Speaker 1>can do it is by significantly impacting the jobs market

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<v Speaker 1>or significantly impacting demand much much more than they're going

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<v Speaker 1>to be able to with rates in these kind of positions.

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<v Speaker 1>So when you hear something like mild recession that you're

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<v Speaker 1>going to adamantly disagree with that that it's going to

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<v Speaker 1>be much more severe, UM, I think that they're going

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<v Speaker 1>to have to try. UM. Maybe to put that in perspective,

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<v Speaker 1>it's not about the recession. It is about how they're

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<v Speaker 1>going to try to get inflation under control. By having

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<v Speaker 1>to bring demand way down or to loosen this job's

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<v Speaker 1>market up quite a bit. If we think that they

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<v Speaker 1>need to get to five percent unemployment UM and that's

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<v Speaker 1>still within their mandate a full employment under NAHRU, then

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<v Speaker 1>that's something like two million jobs added UH a looser

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<v Speaker 1>which could come through participation, or it could come through

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<v Speaker 1>job losses or somewhere in between. And that's a big

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<v Speaker 1>number considering where participation already is with with prime earners.

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<v Speaker 1>You know, we I don't think anyone expects we're going

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<v Speaker 1>to get the fifty plus crowd to uh you know,

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<v Speaker 1>post World War two participation levels in the economy. That

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<v Speaker 1>is going to be tough to achieve. And it's the

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<v Speaker 1>process that is going to be really the problem here

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<v Speaker 1>getting there talking about the Federal Reserve, does you know

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<v Speaker 1>this very tight labor market at the moment, then really

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<v Speaker 1>give the Federal Reserve the license to really, really really

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<v Speaker 1>be aggressive. Yes. And and this is I think a

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<v Speaker 1>point that UM bond investors or the markets are missing

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<v Speaker 1>a little bit, this idea that we're going to get

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<v Speaker 1>this UM curve in version and UM in the place

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<v Speaker 1>to be a longer duration right now. I don't think

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<v Speaker 1>that's the case right there, because the FED actually needs

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<v Speaker 1>to loosen up the labor market and actually has to

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<v Speaker 1>work towards slowing this economy. UM. The curbing version is

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<v Speaker 1>a is a an expect expression of expectations that the

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<v Speaker 1>FED will eventually have to cut into the downturn, which

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<v Speaker 1>I don't think they're going to shift to so soon.

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<v Speaker 1>That means that this labor market is really the key here.

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<v Speaker 1>They have got to get this thing looser somehow or another.

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<v Speaker 1>And that is going to mean that probably fixed income

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<v Speaker 1>UM is the biggest risk asset actually right now as

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<v Speaker 1>they work towards creating a weaker economy, and UH in

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<v Speaker 1>credit markets and rates markets adjust to that. So we

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<v Speaker 1>began the conversation by acknowledging downside risk for the equity space.

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<v Speaker 1>And if you're saying to me, now, hey, there's more

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<v Speaker 1>downside possible in the fixed income arena, where do you

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<v Speaker 1>put capital to work to derive any type of return

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<v Speaker 1>right now? Yeah? It's it's not an easy one, is it.

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<v Speaker 1>I think that the place to be is in inflation sensitivity.

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<v Speaker 1>Right now, we know that China is going to try

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<v Speaker 1>to UM control the downward growth expectations that are that

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<v Speaker 1>are coming into this COVID policy. So this new credit

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<v Speaker 1>expansion of this idea that they're going to have to

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<v Speaker 1>stabilize their property markets and go to their traditional playbook

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<v Speaker 1>of infrastructure build. Along with the fact that the US

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<v Speaker 1>housing situation that we have right now is just as

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<v Speaker 1>much supply as it is demand, means that I think

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<v Speaker 1>the pressure on based materials. Materials in this inflation sensitive

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<v Speaker 1>environment is actually the place to be, whether that's through

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<v Speaker 1>the equity markets, um even in energy in places and energy,

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<v Speaker 1>or through commodities themselves is probably your best bet for now.

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<v Speaker 1>Balance that with some really solid defensive companies that have

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<v Speaker 1>global pricing power and healthcare. And healthcare I think is

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<v Speaker 1>the one the anti cyclical area that actually benefits from

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<v Speaker 1>all this with the aging population and with the with

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<v Speaker 1>the M and A that will happen in this space

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<v Speaker 1>for efficiency and earnings starting off of course Thursday, US time,

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<v Speaker 1>these banks are coming up probably not so great to

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<v Speaker 1>look at those, but other companies forward guidance is going

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<v Speaker 1>to be absolutely vital, that's right, and I think earnings

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<v Speaker 1>is actually gonna hold up quite well. Um, the banks,

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<v Speaker 1>especially the ones with trading revenue, will actually appear to

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<v Speaker 1>do quite well. I'm not sure investors will pay up

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<v Speaker 1>for that. Trading revenue, UM, lending revenue will be challenged.

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<v Speaker 1>But it's really the guidance and that's right, it's how

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<v Speaker 1>much are they going to try to kitchen sink this

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<v Speaker 1>here and try to get people's expectations lower given the

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<v Speaker 1>fact that they know what's coming a tougher environment ahead. Um,

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<v Speaker 1>it's gonna be one to watch. I think that Q

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<v Speaker 1>two does just fine. Uh. And really we start to

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<v Speaker 1>see the Q three guidance come down and analysts put

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<v Speaker 1>in hope for Q four in the holiday season. Uh,

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<v Speaker 1>and that's going to be really where the risk lies

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<v Speaker 1>is if we get those those earnings that come in

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<v Speaker 1>through through Q four, which we'll find out about in

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<v Speaker 1>early twenty three. So tighter policy when it comes to

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<v Speaker 1>the FED has generated a lot of dollars strength here,

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<v Speaker 1>and I think the consensus is this has created quite

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<v Speaker 1>the headwind from multinational firms. Is there a way to

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<v Speaker 1>kind of protect yourself in some way from from a

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<v Speaker 1>lot of the dollar strength that we have seen? Um,

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<v Speaker 1>the dollar strength is going to continue, and um, you

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<v Speaker 1>know it's just going to be it's it's those those

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<v Speaker 1>assets that are going to be looking for the relative

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<v Speaker 1>safety of the US through the better profitability of US.

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<v Speaker 1>And it's really the emerging markets that are going to

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<v Speaker 1>in some ways pay the price here is they have

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<v Speaker 1>to really balance this conundrum of inflation versus growth. Um

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<v Speaker 1>they've tried to get ahead of the situation for most

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<v Speaker 1>of let's say, most of Latin America, especially in Asia,

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<v Speaker 1>we've got countries that are still a bit behind the

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<v Speaker 1>curve and inflation, like Korea. They're going to have to

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<v Speaker 1>really work harder to get to get rates higher there

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<v Speaker 1>as well as growth starts to fade. So there's no

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<v Speaker 1>easy way, and I think that we need to really

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<v Speaker 1>continue to watch out for the emerging markets capital flow story,

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<v Speaker 1>especially as as the dollar keeps its strength. Thank you

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<v Speaker 1>so much for joining us down. That was Daniel Gerard,

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<v Speaker 1>senior multi asset Strateages at State Street getting the latest

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<v Speaker 1>on the markets.