Fed Will Cut 25 Bps in September, Evercore ISI's Emanuel Says

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Bloomberg 04:23 · 6357 Views

Julian Emanuel, Evercore ISI chief equity and quantitative strategist, says he expects the Federal Reserve to cut rates by 25 basis points in September. Speaking on "Bloomberg The Close," Emanuel also says the story of the year for markets is corporate earnings and the AI revolution has further to go.

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Transcript

  • 00:00 Everyone really wants to get something definitive out of Jay Powell tomorrow, another sort of mic drop moment.
  • 00:05 Not sure we're going to get that, But this is still a prelude to a September meeting that pretty much everyone universally believes is going to have at least some type of rate cut.
  • 00:14 There will be a rate cut in September.
  • 00:16 We think it's 25.
  • 00:18 When you look at
  • 00:19 slightly less than four cuts priced into the end of the year,
  • 00:24 that is less
  • 00:26 definitively this is what's going to happen.
  • 00:28 Then probability modeling
  • 00:30 again, remember
  • 00:31 it's only two weeks ago we thought we were having a growth scare, heart attack and the VIX was at 65.
  • 00:39 The data has been good since then, but there is this revision, residual fear in the market that you could always roll over.
  • 00:46 And obviously, yesterday's
  • 00:47 payroll revisions reminded us
  • 00:50 of that.
  • 00:51 And so that's sort of a risk adjusted number, but we do think you're going to get 25.
  • 00:56 Well, what do you make of the idea that when you hear like Susan Collins and Patrick Harker and
  • 01:01 I think even Jeffrey Schmidt kind of kind of throwing water on this idea that the Fed
  • 01:05 should even cut it all,
  • 01:07 at least if you believe Schmidt's words.
  • 01:08 But with Harker and Collins, they kind of said, yeah, we're willing to cut, but
  • 01:12 I mean we're not giving you 100 basis points this year,
  • 01:15 no.
  • 01:15 And and
  • 01:16 our base case is 75 like Muhammad's.
  • 01:19 But
  • 01:20 let's go back and remember in January when there was six cuts priced in
  • 01:27 over the course of the year
  • 01:29 and we went down to one cut priced in at mid year.
  • 01:33 Expectations have been swinging and at the end of the day, there's been a lot of noise around that.
  • 01:39 But ultimately the story of this year has been actually earnings and that's been the support for the stock market.
  • 01:47 The market still expecting 96 basis points
  • 01:50 to the end of the year.
  • 01:50 So does tomorrow become a market event?
  • 01:54 I I don't think so.
  • 01:55 Again,
  • 01:56 for us it it, it's, it's, it's this risk function.
  • 02:00 Yeah.
  • 02:01 And I think that,
  • 02:03 you know,
  • 02:03 there's a lot of this memory,
  • 02:05 particularly given the action today,
  • 02:07 which if you look at it is really a correction of literally
  • 02:12 a straight line higher in the last two weeks.
  • 02:15 So not surprising
  • 02:17 by that
  • 02:18 perspective.
  • 02:19 But going back to 2022 when you had that, you know, bam
  • 02:24 sort sort of moment
  • 02:26 at Jackson Hole and everyone really would rather think that they can have next week is a vacation week.
  • 02:33 But to us to that point,
  • 02:35 is NVIDIA going to be a market event or an NVIDIA event next week?
  • 02:38 It likely will.
  • 02:39 I thought that Wednesday, but is anyone else going to be off?
  • 02:41 Alex, come on,
  • 02:43 It likely will.
  • 02:44 And and frankly, part of our view
  • 02:47 that one of the smartest things you can do is own technology
  • 02:52 convexity in your portfolio
  • 02:54 is that when you look at a stock like that, it has traded between 90 and 140 over the last three months,
  • 03:01 a mind bogglingly gigantic range.
  • 03:05 And if anyone tells you they know exactly how that stock is going to react
  • 03:09 to what will undoubtedly be a good earnings report,
  • 03:14 they got a bridge in Brooklyn to sell you as well.
  • 03:16 Yeah,
  • 03:17 which I think has been sold a few times over.
  • 03:19 Anyone actually got paid?
  • 03:20 I am curious.
  • 03:21 So it's funny to use the word convexity, though.
  • 03:22 Does that apply to other names outside of NVIDIA or really just to the broader market?
  • 03:26 When you look at the potential for additional volatility and really the uncertainty
  • 03:31 that I think
  • 03:32 a lot of people think we're heading into given this rate easing cycle, given an election, given geopolitics,
  • 03:37 where does convexity play in the broader portfolio?
  • 03:39 Well, well, we think it it, it can apply in other parts of the market.
  • 03:43 But when you think about what this year has been,
  • 03:46 it really is a technology driven bull market.
  • 03:49 And from our point of view the AI revolution does have further to go.
  • 03:54 But yet you had this massive air pocket that obviously is not just the semi names,
  • 03:59 but other names.
  • 04:00 And in these kinds of technology driven bull markets,
  • 04:04 you want to sort of
  • 04:06 protect the things that are going to move the most.
  • 04:08 Is there anything though, I mean specifically with regards to that technology trade, is there anything in that trade right now that gives you pause at all?
  • 04:16 It's really just the degree of movement.
  • 04:18 I have to tell you, I go back to call it July the 4th,
  • 04:22 the amount
  • 04:24 of buying high and selling low
  • 04:27 that we have seen in the markets, which is really, you know, kind of
  • 04:32 alarming behavior in general.
  • 04:35 It's about as concentrated as anything that we've ever seen.
  • 04:40 And, and, and that just tells you
  • 04:42 that investors are a bit fearful,
  • 04:44 they're
  • 04:45 uncertain.
  • 04:46 And I think what's going to happen is we go through the fall and obviously the election
  • 04:50 is a big part of that uncertainty.
  • 04:53 And there's no coincidence that the politics, the uncertainty of the politics, if we had a political VIX going back.
  • 05:00 To July, it would probably be 200.
  • 05:02 Yeah, I don't even know what would go into that.
  • 05:04 That would be kind of crazy.
  • 05:05 So if,
  • 05:05 if that large cap tech is still defensive basically at the end of the day, if what I'm hearing is, is relatively correct, what else is defensive?
  • 05:14 So, so we really think that
  • 05:17 the more traditional defensive areas,
  • 05:19 consumer staples and healthcare,
  • 05:21 actually the Fed cut playbook,
  • 05:24 those sectors work virtually all the time.
  • 05:27 And if you think about it, it makes sense
  • 05:29 because they're less convex to an economic slowdown.
  • 05:34 And it's even more interesting this time because both of those areas
  • 05:37 have sort of been penalized a bit over the last year because of the GLP one
  • 05:42 phenomenon and we there's lots of value to be had there.