What to Expect From the Fed in Jackson Hole?

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Bloomberg Aug 21 04:55 · 16.1k Views

UBS Senior Equity Strategist Nadia Lovell says US Federal Reserve Chair Jerome Powell is likely to push back at Jackson Hole on the likelihood of a 50 basis point cut. She speaks to Bloomberg's Matt Miller, Sonali Basak and Katie Greifeld on "Open Interest." (Interview occurred on August 19, 2024)

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Transcript

  • 00:00 You know, the VIX spiked up to 65 a couple of weeks ago and everyone told us to buckle up for, you know, more volatility to come.
  • 00:08 We're seeing it trade right now at 15.
  • 00:11 Are we going to see another battle volatility or is this smooth sailing until maybe the election?
  • 00:16 Unlikely.
  • 00:17 That is smooth sailing.
  • 00:18 I mean seasonality will start to kick in again when we get into September.
  • 00:22 I don't necessarily think that we'll get back to the spike in VIX that we saw a few weeks ago, but remaining in sort of the May teens, probably unlikely maybe we'll trend back up into sort of a 20 plus
  • 00:32 our range.
  • 00:33 We typically see volatility pick up in September, October ahead of an election.
  • 00:37 And then also we'll have conference season started right after
  • 00:41 Labor Day until we'll get updates from companies on the state of the consumer to state on an economy and overall profit.
  • 00:47 So that could cost some volatility in the market as well.
  • 00:49 Yeah, you think about some of the potential catalysts that could get us up to the 20s again on the VIX.
  • 00:54 I mean, it's a pick your poison type of week, Jackson Hole, politics, retail earnings.
  • 00:59 When you think about sort of the cadence of this week, what are you going to be paying most
  • 01:04 attention to?
  • 01:05 A couple of things.
  • 01:06 Of course, earnings are most important to us.
  • 01:08 You know,
  • 01:09 we want to hear what companies are saying, what pressures they're continuing to have.
  • 01:13 But then of course, we have at the end of the week Jackson Hole and we will want to hear from Chairman Powell and how he's interpreting the data and whether we'll start to get some smoke signals on the potential rate cut in September.
  • 01:25 Certainly some of the committee members have been coming out and some of the governors have been coming out, suggesting that we could start to see the cut in cycle in September, which we do believe will start of Jackson Hole as well.
  • 01:34 A lot has changed since that last Fed meeting at the end of July.
  • 01:38 When you think about Jackson Hole, how much can it recalibrate what investors have now baked into the market
  • 01:43 of more than 100
  • 01:45 basis points of rate cuts through the end of the year?
  • 01:47 You know, we've seen that repricing come down quite a bit in the last week.
  • 01:50 You remember at one point during the height of the volatility of last couple of weeks, the market was pricing in over 130 by
  • 01:56 30 basis points of cuts.
  • 01:57 Now we're sort of at 95 basis points of cut.
  • 02:00 We do think that Chairman Powell is likely to push back on the market about 50 basis points of cut simply because of the macro data of the last week has come in better.
  • 02:08 We've had retail sales inflation seems to be back on that disinflation path again.
  • 02:12 And so the inflation data suggests that the cutting cycle should start and then how deep that cutting cycle will be will depend on the labor market.
  • 02:19 And right now claims have come back down
  • 02:21 all we'll be watching September 6th to see what happens on payrolls.
  • 02:25 I think that's going to determine whether we get A50 basis points.
  • 02:27 But standing here today in terms of the data so far, it does suggest that 25 basis points is more likely.
  • 02:33 And so Powell is like the Wolf's pushback.
  • 02:34 I think we've come far away from two years ago that 8 minute speech where he said they will be paying ahead
  • 02:39 with 80% back to, you know,
  • 02:41 in terms of inflation target
  • 02:44 and the
  • 02:45 economy is growing above trend like wow,
  • 02:47 impressive.
  • 02:48 Well, but but we do expect a cutting cycle,
  • 02:51 right?
  • 02:52 At least they've prepared the market for that.
  • 02:55 What do you want to own into a reduction in the Fed funds rate?
  • 02:59 I think you want to still continue to hone those quality names.
  • 03:02 You know, I think the market has already sort of priced in a rate cut.
  • 03:05 So it's really goes back to fundamentals that are going to drive this.
  • 03:08 You have seen small cap catch a bit in terms of the expectations of rate cuts.
  • 03:13 But reality is, you know, anything more than 100 basis points would suggest that we're in a more dire situation for the economy and that's not good for small companies.
  • 03:20 So when necessarily lead into that trade, we would continue to lead into those secular growth stories within tech,
  • 03:26 some cyclical exposure in terms of industrials and maybe even a little bit of financials that you know could benefit from a rate cut as you know the cost of capital comes down.
  • 03:34 Well, let's talk about the rest of the year because your house view your S&P 500 price target 5900, you think about where we closed on Friday
  • 03:42 at just above 5500.
  • 03:44 Is there any way to get to 5900 by the end of the year without tech leadership?
  • 03:48 If you just think about the makeup of that benchmark,
  • 03:51 I think is going to be challenging.
  • 03:52 You don't you don't necessarily need tech to have the same magnitude of leadership that it's had over you know the last several months.
  • 03:59 We think that that leadership will temper protect will continually.
  • 04:02 We would like to see the more broad based participation of the market because that will help sustain this, you know, bull market over the longer term.
  • 04:09 And you already seen that.
  • 04:10 You've seen that in terms of the earners growth that we saw in the second quarter.
  • 04:13 You're finally seeing the broadening out of the earns.
  • 04:16 You've seen the 493 back into the black after several quarters
  • 04:19 of contraction.
  • 04:20 But again, we think that's tech to your point and just the sheer fact that there's such a large cap
  • 04:25 for a large market weight in the index, that has to be a part of that story.
  • 04:29 Well, just to tie a bow on that point, it sounds like what you're saying is you think about that broadening out.
  • 04:34 It would be nice to see, but it sounds like a nice to have rather than to get back really into bull market mode.
  • 04:40 We need big tech.
  • 04:42 This past year has shown us that that they need to be part of the the participation.
  • 04:46 I don't think that the broader market is enough to get us to that 5900.
  • 04:51 Maybe the broader market is enough to get us to 5600 and sort of
  • 04:55 stay there.
  • 04:55 But I think that you need tech to be a part of that.
  • 04:57 Here's the thing.
  • 04:58 The last time we saw the jobs report there was.
  • 05:00 2 words that pervaded the market that seemed to have go away.
  • 05:03 That is growth scare.
  • 05:04 And if you believe in that broadening of the market, then how much does that growth scare start to
  • 05:09 really halt
  • 05:11 a further rally?
  • 05:12 Absolutely.
  • 05:13 If we if we do see a weak job markets, a job report again on September 6, you know, if we see the tick up unemployment, you are going to get the market question.
  • 05:22 And again, you know it's economic growth
  • 05:24 really sustainable.
  • 05:25 I mean, so far you're seeing the data coming in pretty strongly.
  • 05:29 And if you see any sort of weakness from the consumer, that broader rally is not going to be sustained.
  • 05:34 People will continue to revert back to sort of the old trades of secular winners, you know more quality companies.
  • 05:40 And that is at the end of the day, that has
  • 05:42 proven to be technology companies.