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Speaker 1: Let's get to our guess, Sean Darby, chief global equity

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Speaker 1: strategist at Jeffreys, to take a look at the markets. So, Sean,

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Speaker 1: we want to talk about the FED and what we

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Speaker 1: might expect to hear from j Pal. But maybe the

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Speaker 1: action today maybe just a little surprising, given that you know,

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Speaker 1: it's late in the week, you're waiting on the speech

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Speaker 1: from from Jackson Hall, and you're expecting probably to hear

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Speaker 1: some pretty bill are some pretty hawkish commentary from the chair,

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Speaker 1: and yet markets rally like this. Is that just um

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Speaker 1: summer and low volumes and and that sort of thing,

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Speaker 1: or is there some sort of underlying message. I think

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Speaker 1: there is an underlying message. I think what's really happening

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Speaker 1: is that with an inverted yolk of both at the

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Speaker 1: long end and at the short end, the market is

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Speaker 1: starting to make a some assessment that we will touch

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Speaker 1: or get to peak rates sometime in the sort of

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Speaker 1: foreseeable future, which is presumably six to twelve months. And

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Speaker 1: the curve inverted gain yesterday, and I think that's what

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Speaker 1: primarily drove the equity market, is there's an anticipation that

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Speaker 1: they will be hawk ish, but the reality is that

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Speaker 1: we're not too far away from the sort of peaking

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Speaker 1: rates or the pace peaking rates, and certainly rate the

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Speaker 1: rates cycle will decelerating its in its path now, and

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Speaker 1: I think that's what's been driving equity markets for the

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Speaker 1: last two months. And alongside that, positioning and sentiment has

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Speaker 1: been awful. I mean, there is nobody bullish out there,

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Speaker 1: which generally says the crowd is probably going to be

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Speaker 1: wrong for a for a period of time. Yeah, Jim

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Speaker 1: Blad definitely expressing a desire to get to peak grades

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Speaker 1: sooner rather than later. But does peak grades also mean

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Speaker 1: peak inflation? Is how we're going to hit the fits

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Speaker 1: tag at beer at about the same time? I think

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Speaker 1: probably not, And I think the mark the markets are

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Speaker 1: also suggesting that that's going to be a more difficult path.

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Speaker 1: I either trains going to arrive at the station, but

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Speaker 1: we don't know, you know, it's going to be early

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Speaker 1: or late. And I think the mark what what's happening

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Speaker 1: with inflation expectations is they've started to move down, and

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Speaker 1: provided that trajectory is still one where it's descending, the

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Speaker 1: markets are probably quite happy that that's the path now

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Speaker 1: of least resistance. But I agree with your earlier point

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Speaker 1: that the FED does not necessarily like financial assets doing

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Speaker 1: well at this stage because it will end up undermining them.

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Speaker 1: There was this bit of data released today that a

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Speaker 1: measure of US profit margins has reached its widest since

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Speaker 1: nineteen fifty. Now, that's kind of interesting. It suggests that

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Speaker 1: prices charged by companies out there are outpacing what they're

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Speaker 1: paying out in terms of higher costs for both production

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Speaker 1: and labor. That's correct. Actually the margin story is defied,

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Speaker 1: defied the gloomsters, and I have to put my hand

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Speaker 1: up and say I've been one of them. And there's

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Speaker 1: been two reasons. There been a paper that's been recently

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Speaker 1: produced which showed actually that companies are used the inflation

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Speaker 1: cycle to ray or to increase markups. That is that

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Speaker 1: if prices a steeler gone up five pc, they put

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Speaker 1: a mark up maybe of something x plus on that.

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Speaker 1: And the second one a bit earlier, I think it

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Speaker 1: was from the Federals of Boston, highlighted the fact that

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Speaker 1: over the last I think at least decade, there's been

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Speaker 1: such a degree of ologopalization and industry concentration that that

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Speaker 1: was also a reason why companies had this almost perfect

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Speaker 1: cost passed through. Your consumers always at the bottom of

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Speaker 1: the heap when it comes to cost pass through. I'm

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Speaker 1: just quickly, what's your salisment of consumer health? Well, again,

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Speaker 1: the sentiment indicators pretty much globally now the worst ever,

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Speaker 1: which suggests to me that you only have to have

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Speaker 1: a further fall in oil prices or a drop in

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Speaker 1: CPI and perversely the consumer might go out there and

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Speaker 1: run up and spend again, making the FEDS life a

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Speaker 1: lot more difficult. And as sewn, as Brian mentioned a

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Speaker 1: little earlier, he's wondering out what the neutral rate is

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Speaker 1: for the fit. What are your thoughts on this? That's

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Speaker 1: a very good question. Well, the first thing is we're

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Speaker 1: going to start to find out what it is, because

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Speaker 1: the next seventy basis points will take us into that

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Speaker 1: sort of territory where things are supposedly going to be relative,

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Speaker 1: relatively much more restrictive. Number one. Number two is that

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Speaker 1: I think the issue with the trying to determine it

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Speaker 1: is that we have to look at these things holistically.

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Speaker 1: And if you look at, for example, the dollar move,

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Speaker 1: if you look at a trade weighted dollar going up

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Speaker 1: temper sent that's equivalent to fifty basis points. So when

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Speaker 1: Jerome Power does mention the words financial conditions, I think

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Speaker 1: that's a much more relevant measure because if you take

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Speaker 1: a look at credit spreads, where the your curve is

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Speaker 1: and the dollar, you would probably sense that the financial

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Speaker 1: conditions are somewhere close to where we were in eighteen

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Speaker 1: where they did this pivot. So to once your question,

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Speaker 1: we're probably going to go somewhere close to three three

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Speaker 1: point five on the FED funds rate that that's that's

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Speaker 1: where the sort of two years sort of trading around.

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Speaker 1: But I would hazard a guess that getting there is

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Speaker 1: probably going to be much more difficult because I think

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Speaker 1: holistically the financial conditions are already quite tight and therefore,

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Speaker 1: you know, mistake policy that we're in the policy mistake

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Speaker 1: zone now. I feel that once we start to go

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Speaker 1: into this new virgin territory, that that's going to be

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Speaker 1: quite a difficult space for the Federal Reserve to operate in.

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Speaker 1: It is a very interesting debate about how tight financial

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Speaker 1: conditions are because a lot of people are sort of

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Speaker 1: saying to the Fed, you know, the stock market rising

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Speaker 1: like this is no good for what you're trying to do.

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Speaker 1: But as you mentioned, with a strong dollar and some

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Speaker 1: of the federal largest rolling off right those transfer payments

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Speaker 1: and such that maybe it's a little tighter than than

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Speaker 1: we thought. Um. So you know, we had Bullard today

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Speaker 1: actually making a comment about about are you know getting

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Speaker 1: that Let's say, what did he say? He said something

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Speaker 1: about um inflation could remain higher for longer than Wall

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Speaker 1: Street or the market things. He didn't say that economist things.

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Speaker 1: He's gearing it at the market there. It's a little puzzling. Yes,

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Speaker 1: I think I think there's everyone's trying to bash the

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Speaker 1: equity market. I think the way I would look at

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Speaker 1: it is that capital raising, or the ability of companies

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Speaker 1: to raise money in the equity market and particularly in

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Speaker 1: the higher credit space, is really really diminished. So in

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Speaker 1: that respect, irrespect of what the day to day movements

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Speaker 1: of the stock market are. In fact, getting companies to

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Speaker 1: get getting clients to under right deals at the moment,

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Speaker 1: both in bond and equity markets is actually very difficult.

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Speaker 1: So to answer the question, I would say that generally,

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Speaker 1: classic recessions are periods of time when you do find

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Speaker 1: companies not being able to refinance and going to the

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Speaker 1: wall or going through some form of restructuring. And I

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Speaker 1: do actually think that's going to be the next stage

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Speaker 1: of this cycle, and that will be the one where

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Speaker 1: people will puzzle as to how far the Federals really

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Speaker 1: will might go through its mandate on inflation. So taking

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Speaker 1: a look at things holistically again, UM, if you if

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Speaker 1: you can't raise capital, you can't hire people, and you

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Speaker 1: can't spend on investment, and you'll probably somewhere into the

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Speaker 1: point of having a having a recession. Well you are,

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Speaker 1: of course the chief global equity strategist at Jeffreys. When

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Speaker 1: you look across equity to the world over, where where

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Speaker 1: is the best place to put your money right now?

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Speaker 1: Is that the US? Or do you look offshore? Um?

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Speaker 1: I think two things. I think the US is a

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Speaker 1: cleaner story in terms of where you are on the

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Speaker 1: policy tightening, and as I said, the yield curve has inverted,

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Speaker 1: saying that you're somewhere coming to the end end of

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Speaker 1: that process. Perversely, the market that might show will demonstrate

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Speaker 1: some of the more better economic data at the margin

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Speaker 1: and has a policy completely opposite to everybody else's Japan

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Speaker 1: and Japanese stocks have languished in the last eighteen months

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Speaker 1: as they had a pretty much a pretty poor, poor,

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Speaker 1: poor roll out of the of its vaccine. But essentially

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Speaker 1: Japan is set up pretty well, not only because the

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Speaker 1: yen is extraordinarily cheap, but any fall in energy prices

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Speaker 1: takes a lot of pressure of domestic j GB yields.

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Speaker 1: And briefly, what about Hong Kong and China? Are the

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Speaker 1: valuations low enough to offset some of the issues. Well,

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Speaker 1: that is very true. The cyclical adjusted Schiller p for

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Speaker 1: the hs I is close to record lows. I guess

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Speaker 1: the difficulty here is that you are going through a

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Speaker 1: tightening process in in the US and also you still

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Speaker 1: having a profit recession in China itself. So if you

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Speaker 1: can withstand at twelve months of sort of nervousness and

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Speaker 1: biting your nails, it's probably a good time to be

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Speaker 1: picking up some of the stocks. But as I say,

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Speaker 1: I think going into year end, I suspect hs I

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Speaker 1: will still languish somewhere where we are at the moment.

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Speaker 1: All right, Seawan Darby, great to get to your insights.

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Speaker 1: Sean Darby is chief Global equity strategist at Jeffreys