Speaker 1: Let's get to Dan Girard, who's with us for the
Speaker 1: half hour. Dan is the senior multi asset strategist at
Speaker 1: State Street. He happens to be on the line from Bogata, Columbia. Dan,
Speaker 1: thanks for being with us. The focus is on this
Speaker 1: hot reading that we had on the US retail inflation.
Speaker 1: The FED is clearly behind the curve here and they
Speaker 1: have adopted very very hawkish language to try to get
Speaker 1: the market in line. How much more downside risk is
Speaker 1: there right now for the equity space? Oh, I think
Speaker 1: quite a bit. And I think that what's actually fascinating
Speaker 1: about this is that the market really isn't listening. I've
Speaker 1: been thinking this for a little while that we've had
Speaker 1: all the pieces of the puzzle come together here. We
Speaker 1: had FED minutes which explicitly said that inflation could be
Speaker 1: entrenched if the public questions their resolve of the committee.
Speaker 1: And then we had jobs numbers that were blistering, And
Speaker 1: now we've got inflation numbers that really show this is entrenched,
Speaker 1: and the market still is sort of thinking this is
Speaker 1: a race to neutral or a little bit above new
Speaker 1: role um kind of of a play here. This isn't
Speaker 1: FED speak. The feed is telling us now directly that
Speaker 1: they will march higher um, well into the restrictive zone
Speaker 1: to try to get prices under control. And let's keep
Speaker 1: in mind the rates are still a comminative in this
Speaker 1: period where we're seeing some of the largest inflation of
Speaker 1: our generation. Fundamentally, Danniel will will that policy work. It's
Speaker 1: going to be really hard, um. And this is the problem.
Speaker 1: This isn't monetary. This you know, a complete something in
Speaker 1: the control of monetary policy. Because of this COVID position,
Speaker 1: we're in supply chain issues where we're coming from the
Speaker 1: floor off the bottom of zero rates. UM. This is
Speaker 1: going to be very difficult, and the only way they
Speaker 1: can do it is by significantly impacting the jobs market
Speaker 1: or significantly impacting demand much much more than they're going
Speaker 1: to be able to with rates in these kind of positions.
Speaker 1: So when you hear something like mild recession that you're
Speaker 1: going to adamantly disagree with that that it's going to
Speaker 1: be much more severe, UM, I think that they're going
Speaker 1: to have to try. UM. Maybe to put that in perspective,
Speaker 1: it's not about the recession. It is about how they're
Speaker 1: going to try to get inflation under control. By having
Speaker 1: to bring demand way down or to loosen this job's
Speaker 1: market up quite a bit. If we think that they
Speaker 1: need to get to five percent unemployment UM and that's
Speaker 1: still within their mandate a full employment under NAHRU, then
Speaker 1: that's something like two million jobs added UH a looser
Speaker 1: which could come through participation, or it could come through
Speaker 1: job losses or somewhere in between. And that's a big
Speaker 1: number considering where participation already is with with prime earners.
Speaker 1: You know, we I don't think anyone expects we're going
Speaker 1: to get the fifty plus crowd to uh you know,
Speaker 1: post World War two participation levels in the economy. That
Speaker 1: is going to be tough to achieve. And it's the
Speaker 1: process that is going to be really the problem here
Speaker 1: getting there talking about the Federal Reserve, does you know
Speaker 1: this very tight labor market at the moment, then really
Speaker 1: give the Federal Reserve the license to really, really really
Speaker 1: be aggressive. Yes. And and this is I think a
Speaker 1: point that UM bond investors or the markets are missing
Speaker 1: a little bit, this idea that we're going to get
Speaker 1: this UM curve in version and UM in the place
Speaker 1: to be a longer duration right now. I don't think
Speaker 1: that's the case right there, because the FED actually needs
Speaker 1: to loosen up the labor market and actually has to
Speaker 1: work towards slowing this economy. UM. The curbing version is
Speaker 1: a is a an expect expression of expectations that the
Speaker 1: FED will eventually have to cut into the downturn, which
Speaker 1: I don't think they're going to shift to so soon.
Speaker 1: That means that this labor market is really the key here.
Speaker 1: They have got to get this thing looser somehow or another.
Speaker 1: And that is going to mean that probably fixed income
Speaker 1: UM is the biggest risk asset actually right now as
Speaker 1: they work towards creating a weaker economy, and UH in
Speaker 1: credit markets and rates markets adjust to that. So we
Speaker 1: began the conversation by acknowledging downside risk for the equity space.
Speaker 1: And if you're saying to me, now, hey, there's more
Speaker 1: downside possible in the fixed income arena, where do you
Speaker 1: put capital to work to derive any type of return
Speaker 1: right now? Yeah? It's it's not an easy one, is it.
Speaker 1: I think that the place to be is in inflation sensitivity.
Speaker 1: Right now, we know that China is going to try
Speaker 1: to UM control the downward growth expectations that are that
Speaker 1: are coming into this COVID policy. So this new credit
Speaker 1: expansion of this idea that they're going to have to
Speaker 1: stabilize their property markets and go to their traditional playbook
Speaker 1: of infrastructure build. Along with the fact that the US
Speaker 1: housing situation that we have right now is just as
Speaker 1: much supply as it is demand, means that I think
Speaker 1: the pressure on based materials. Materials in this inflation sensitive
Speaker 1: environment is actually the place to be, whether that's through
Speaker 1: the equity markets, um even in energy in places and energy,
Speaker 1: or through commodities themselves is probably your best bet for now.
Speaker 1: Balance that with some really solid defensive companies that have
Speaker 1: global pricing power and healthcare. And healthcare I think is
Speaker 1: the one the anti cyclical area that actually benefits from
Speaker 1: all this with the aging population and with the with
Speaker 1: the M and A that will happen in this space
Speaker 1: for efficiency and earnings starting off of course Thursday, US time,
Speaker 1: these banks are coming up probably not so great to
Speaker 1: look at those, but other companies forward guidance is going
Speaker 1: to be absolutely vital, that's right, and I think earnings
Speaker 1: is actually gonna hold up quite well. Um, the banks,
Speaker 1: especially the ones with trading revenue, will actually appear to
Speaker 1: do quite well. I'm not sure investors will pay up
Speaker 1: for that. Trading revenue, UM, lending revenue will be challenged.
Speaker 1: But it's really the guidance and that's right, it's how
Speaker 1: much are they going to try to kitchen sink this
Speaker 1: here and try to get people's expectations lower given the
Speaker 1: fact that they know what's coming a tougher environment ahead. Um,
Speaker 1: it's gonna be one to watch. I think that Q
Speaker 1: two does just fine. Uh. And really we start to
Speaker 1: see the Q three guidance come down and analysts put
Speaker 1: in hope for Q four in the holiday season. Uh,
Speaker 1: and that's going to be really where the risk lies
Speaker 1: is if we get those those earnings that come in
Speaker 1: through through Q four, which we'll find out about in
Speaker 1: early twenty three. So tighter policy when it comes to
Speaker 1: the FED has generated a lot of dollars strength here,
Speaker 1: and I think the consensus is this has created quite
Speaker 1: the headwind from multinational firms. Is there a way to
Speaker 1: kind of protect yourself in some way from from a
Speaker 1: lot of the dollar strength that we have seen? Um,
Speaker 1: the dollar strength is going to continue, and um, you
Speaker 1: know it's just going to be it's it's those those
Speaker 1: assets that are going to be looking for the relative
Speaker 1: safety of the US through the better profitability of US.
Speaker 1: And it's really the emerging markets that are going to
Speaker 1: in some ways pay the price here is they have
Speaker 1: to really balance this conundrum of inflation versus growth. Um
Speaker 1: they've tried to get ahead of the situation for most
Speaker 1: of let's say, most of Latin America, especially in Asia,
Speaker 1: we've got countries that are still a bit behind the
Speaker 1: curve and inflation, like Korea. They're going to have to
Speaker 1: really work harder to get to get rates higher there
Speaker 1: as well as growth starts to fade. So there's no
Speaker 1: easy way, and I think that we need to really
Speaker 1: continue to watch out for the emerging markets capital flow story,
Speaker 1: especially as as the dollar keeps its strength. Thank you
Speaker 1: so much for joining us down. That was Daniel Gerard,
Speaker 1: senior multi asset Strateages at State Street getting the latest
Speaker 1: on the markets.