Fed expects higher interest rates to remain in place

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There’s a closing bell on wall street there is your closing bell on this hump day stocks ending the day on a downward note not a whole lot of action as you can see the dow down to 28 points the s p down about 12 when the nasdaq barely slipping to the downside nine points not a whole lot of reaction to the fed minutes for a closer look at the broader markets let’s

Bring in eric friedman u.s bank asset management cio and hugh roberts quant insight head of analytics good to see you both uh eric let’s start with you any takeaway from the fed minutes or do you expect tighter longer nothing’s really changed the dynamics here yeah i think it’s a it’s a story that we’ve heard from the fed really most specifically post jackson hole

Which is rates higher and higher for longer i think that was really the the key message coming out of this this set of minutes i think the key thing for us as we think about the really the talent of this year is not so much what happens next meeting but more what does it look like for the fed in the first quarter of next year by that point we expect to have a little

Bit of guidance from companies which should be a little more sobered and and perhaps a bit more tepid than what we may hear right now so our viewpoint is the bar is pretty high for the fed to come off it’s its current rate pass for this year but if we get into the first quarter of next year with some downbeat company guidance i think the fed may start to waiver at

Least a little bit and hugh as you look at the fed minutes and also some of these data points that you know that the fed is watching and really looking for this sustained inflation to start going down what is your outlook yeah i would largely echo uh eric’s comment first up i think this year and the immediate you know next couple of meetings are pretty much locked

In uh really 2023 and the outlook there is more important i guess if we’re trying to um look a wee bit further ahead i think the comments um from deputy chair brainard have been probably the most interesting uh because the the messaging has been consistent it’s been about tightening financial conditions that’s been true all year and and as eric said it went up a

Gear after jackson hole reynard appears to be the one who is just flagging the fact that uh overseas markets are seeing stress uh we’ve seen obviously intervention in dollar yen uh we’re all aware of the shenanigans going on here in the uk after the mini budget a few weeks back i know the whole kind of move fast and break things i think in the states you’re used

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To looking at um things like inverted yield curves or credit spreads as the things that might domestically be the things that break but actually it’s looking like it’s international stuff that is breaking first and brainard seems to be flagging that up a little bit so very early days yet it’s not obvious she’s got a consensus at all but she’s the one potential

Outlier um as things currently stand eric what do you think this measures in terms of the pricing activity that we’re going to see between now and your end are we going to remain volatile or is more of their that risk to the downside do you think from these levels we think probably a little more risk to the downside and i i would just tip my captain q and their

Firm they do great work on this topic uh specifically but just in terms of our read on things we say really a couple things that work number one is that we think we’re largely in sync with the feds most recent thoughts regarding the forward the state of the curve in other words we think that the market is really in tune with what the fed is thinking with respect

To interest rate hikes that’s really the first repricing that we’ve had you cover this as a team very well in the last segment and we think what’s next is the slowdown almost the the lagged impacts of higher rates still elevated fuel costs still elevated shelter costs we think that’s going to start to really weigh in on margins and so we do think there’s probably a

Little more downside we wouldn’t be abandoning ships if you will right now but we do think that in terms of risk to the equity market we’d still be leaning a bit more defensive as you pointed out utilities and infrastructure those have been areas that we’ve actually been been fairly constructive on they’ve they’ve been we think on unduly hits in recent days those

Are getting more attractive we’d stick around in energy as well those would be our top ideas right now here you say the latest uh down move has not been a function of macro fundamentals what are you seeing well it’s more of the fact that we’re being uber tactical here uh to be fair so you know the the primary trend throughout 2022 has been at macro conditions for

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U.s equity markets have got worse and that’s largely a function of what we talked about just now i.e tighter financial conditions and in particular they’re moving real yields and the moving credit spreads uh what’s interesting from a very short-term perspective is that this latest downtrend i’m talking in the last week now um our model value is actually flatlined

So that this very latest down move has been less justified by macro fundamentals than from much of the bear market price action of the last nine ten months so if you are in a kind of repeat of the summer potential for a bear market squeeze looking at positioning looking at beating up sentiment i saw an interesting tweet today about um insider buying picking up um it

Tends to get people interested when you know uh ceos are buying their own stocks um if you’re if you’re thinking there’s a scope for a bit of a tactical squeeze within the context of the primary bear market then what we’re seeing at the moment actually is that um s p is around six percent cheap to our model value because macro conditions have kind of stabilized that

At the lows and this latest sell-off has gone a little bit further so i still agree with that the primary bearish uh dynamic that that’s been espoused but there may be some hope for a little bit of a bear market squeeze and eric there’s some that you speak to what lens are you are you suggesting that they really view this period through yeah it’s a great question

I think that you know for those that have capital that they need in the what’s called the next three to six months uh we think that like a great place to be is in very short duration fixed income for a long time we just haven’t been paid rochelle to be involved whatsoever in that part of the in that part of the curve not just say that there isn’t some potential

Price risk but just as you hit in the earlier segment if you’re looking at corporate bonds that are spitting out five five and a half six percent yields not a bad spot to be in very very short maturities i do think that for those clients that have the ability to kind of piece into stuff we would not be aggressively involved in technology consumer discretionary right

Now we do think that the supply demand and balance will still skewed the wrong way for technology in the media term but again we do think that there’s likely to be some rationalization towards the middle to the second half of next year for again for longer term investors so our viewpoint has been look take what you’re giving in this market don’t don’t trade the

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Market that you want trade the market that you have and and so grabbing some yield up front makes sense we do think that there’s a time to again reconcile the the second half of next year we’re just not there quite yet and you one of the challenges in this market now is a strong dollar that of course is being felt on a global scale we did get the earnings out from

Pepsi this morning that were actually better than expected some were wondering whether or not i guess how big of a threat that strong dollar would be to a name like pepsi what do you think today’s results really tell us just about well we can expect this earnings season well from a macro perspective i had the pepsi earnings were bad news uh from the fed’s policy

Making perspective because it basically showed that they have pricing power and that they’re going to increase margins um and that’s not good for the fed who want to see uh demand slow down obviously um more broadly i agree totally that um the strength of the dollar is going to be a key key issue um for this particular earnings season on our analysis we have the

Ability to break down uh patterns between say sectors and the strength of the dollar and it’s the independent pattern will we are able to strip out the isolated impact the dollar uh on different assets and what stands out on our analysis at the moment is that if you look at the likes of energy either xle oih xop they’re all comparatively uh uh indifferent to the

Dollar it’s not really a big driver of price action in the energy etfs at the moment but it’s technology that is most vulnerable and that’s true for example okay it is true for something like consumer discretionary where of course amazon and tesla are i think are nearly 50 of that sector and it’s especially true for something like socks the semiconductor etf so

I think that’s probably where on our analysis that’s where potentially the most pain is going to be felt

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Fed expects higher interest rates to remain in place By Yahoo Finance