for more inside an early
activity. Let's bring in Mark Howard senior multi asset specialist at BnP paribas.
Mark, glad to have you on this morning. What a day to be on when we get that C. P.
I read hotter than expected that inflation picture.
I want to get your take on what you think it means.
Well, good morning Alicia, thanks for having me. Uh and that was a great recap.
You covered it very comprehensively.
You know what it means is that the Fed is going to have to work harder
and is going to have to kind of change its narrative to get ahead of inflation.
It's been chasing
this hotter than expected inflation for some time
and with the continued elevation and energy prices
and the growing realization that food and other basics are going to continue to see
incremental price hikes. The Fed needs to be more aggressive both
with expectations and with action and with the Fed meeting next week people
are nervous and that's why that's why you're seeing this downdraft today.
So in terms of the Fed having to get more aggressive,
what exactly does that look like?
Does it look like 50 basis points for the next
two hikes and then maybe another 50 basis point hike?
Do we throw 75 basis point hikes on on the table here?
Do you think that's a part of the fear that
the market is starting to price in right now?
Yes.
Alicia,
we certainly anticipate 50 for the next each of the
next three meetings through September and what today told us what
the chatter in the market is today is that 75
is a very real possibility either in June or July,
so
that's not our house call yet,
but it is increasingly of concern because as you rightly pointed out,
Not only is the headline number high,
the core at 6% is a really elevated number,
but more importantly, the data today showed
greater dispersion of inflation. It wasn't just one or two
underlying variables, it was broad
and and to that point,
I think there was a lot of hope over the
last week we've been talking about these numbers going into them
that maybe we see some areas of hope in terms of inflation, you know,
peeking in certain areas,
we didn't really see that this was a
broad picture of overall inflation still being elevated
to that end. Then
when do we hit the peak, do you think this is the peak?
Is that something that's reasonable or at this point, is it just impossible to call?
Yeah, it's it's it's too early to call a peak in our view.
And and one of the reasons for that Alicia
is that inflation is rather insidious and you get
these updrafts in the in the data but then
it starts to reinforce itself through expectations through consumer behavior
through worker behavior and demanding higher wages.
And we're right at the point where we're starting to get
into that negative feedback loop through expectations of future inflation,
partly
reflective of hoarding
and reflective of other behavior and that's why the Fed needs to get ahead of
it and move more aggressively because once we
get into that higher inflation expectations period,
then then there, you know that it's really difficult to tame inflation.
So we're hopeful that they can step up
the commentary show more more aggressive stance and hopefully
nip this before it becomes something that they have to go all out after.
I would almost argue and correct me if I'm wrong here.
Tell me what your thoughts on here that
the Fed having to get more aggressive potentially here only increases
its odds of not having that soft landing when the odds
are already against that favor and making it what would seem
like almost impossible not to pull us into a recession.
What are your thoughts in terms of the chances
of us going into recession following this read and
the reality that that has to get more aggressive?
Yeah,
it's a really interesting cycle Alicia because you've got the pre existing
condition of too much stimulus on the back of the covid rebound,
both fiscal and monetary and then the added bump from
the war in Ukraine and the supply shock from china.
And so the Fed is using really blunt instruments to try and solve
for a very diverse set of catalysts behind this inflation.
So they're going to have to use that blunt instrument rather aggressively.
Fortunately the consumers still spending pretty aggressively,
businesses are still hiring pretty aggressively.
And so we're hopeful that we can get a soft landing,
but with each successive print and the deeper expectations change,
then the Fed is going to have to be even more aggressive.
And as you know, this has become not just an economic issue,
it's become a social and political issue
and that's why there's going to be such a strong focus on
curbing inflation.
Yeah, that that was something I noted at the top of the nine o'clock hour.
The reality is this is going to have, you know,
the macroeconomic impact is going to affect our over our economy.
But midterms around the corner,
I mean,
there is a very real implication in terms of what it does for
the re elections or the new elections of members of Congress and even
as the biden administration, not this year,
but in an upcoming years looks to kind be re elected.
There is a lot of implications here more
broader than the current kind of market activity
that we're seeing. Um, you know,
let's let's focus on energy inflation for a moment because as we know,
energy inflation that has been the most volatile.
It has been the most with oil prices, just driving the price of everything
from gas to food?
I think gas, national, national average is $4.99
and an all time high.
Is there anything that the Fed can do on this issue. My initial thought is, no,
but I want to get your thoughts here,
You know, it is very difficult because the driver, the incremental driver of
of that energy price hike is a supply issue. It's not a demand issue.
So while the Fed can
influence the demand for
fuel broadly defined and power by curbing economic activity,
there's very little it can do about the supply of
particularly refined fuels. And so,
you know, I think the administration has tried to release reserves.
It's negotiating with Saudi and other people to try and boost
oil being produced.
Excuse me. But
there's not a lot the Fed can do that's kind of outside of its
remit.
You know, over the course of the last week or two,
we've talked a lot of analysts and a lot of
experts in terms of what people can do right now,
where do they put their money to work?
Especially in this pullback that we're seeing in
the market and over the last 24 hours.
I think we heard Jim Jim Cramer, you know,
suggest that investors could stick to kind of,
you know, profitable recession proof stocks to avoid
kind of a crisis.
I have a lot of respect for Jim, I don't know,
there's recession proof stocks out there, especially
the form that we're seeing right now in
terms of this being a really unique environment.
But what are your thoughts around around these ideas in
terms of where people can put their money to work?
Is it solidly in blue chip and value stocks right now and really
going into the micro when the macro picture is one that's so volatile.
It is a hard time Alicia and I think that's why you want to
look to people with a lot of experience and a lot of perspective who
either either lived through the late 70s and
80s or at least studied it rather closely
and it is a challenging time for almost all assets. It's not just stocks but bonds
currencies are extremely volatile. So understanding volatility
and and taking advantage of volatility rather than
fearing it and, and basically selling at the bottom and
buying at the top is a really important principle
during volatile times. The other one is
of course emphasizing quality as you just referred to,
whether it's in blue chip equities,
whether it's in higher quality or mid quality bonds,
whether it's um, you know,
the type of company and the leadership of those companies, you know,
blue chip companies will come through this.
It's the weaker companies, the less experienced,
the ones that grew too rapidly are going to have to cut back dramatically.
And we're seeing that almost day by day with warnings out of companies
who were either positioned just for the rebound from covid or
for covid itself
and now they're getting crushed.
And so you want to stay away from
those companies that are more speculative less tested
and focused on blue chips.
To your point there, we were just talking about doc.
You signed earlier in this hour and that's a company that has had,
you know,
that that impact from growth to profitability
as investors have shifted from growth thought mindsets
to profitability mindsets.
Even doc you sign kind of of seeing that direct impact this morning,
got to leave it there, but really appreciate your time and your insight, Mark.
Mark Howard, senior multi asset specialist at BNP paribas,
Always good to talk to you.