Fed: Market expectations have taken a 'dovish tilt,' strategist says

BlackRock Senior Macro Strategist for iShares EMEA Laura Cooper joins Yahoo Finance Live to discuss how markets are performing after the Fed’s FOMC interest rate hike, volatility, inflation pressures, the expectations for a recession in Europe, and the outlook for the economy.

Video Transcript

BRAD SMITH: Quite a bit of commentary from Fed officials already today, with more coming soon, as I was mentioning a moment ago, as markets try to gauge where the central bank is headed and where their head's at. Our next guest says that the Fed hawkishness has likely peaked, along with inflation. But how long will we stay at that peak is a different story.

Let's bring in BlackRock Senior Macro Strategist for iShares EMEA, Laura Cooper. Laura, great to have you here with us today. First and foremost, just help us break down if the Fed hawkishness has actually peaked and inflation, if that's peaked as well here at this point.

LAURA COOPER: Well, I think there's probably a scope for Fed hawkishness to persist. But what we're seeing in terms of rates markets is actually this recalibration of expectations after markets really interpreted last week's FOMC meeting with a dovish tilt. So clearly, we are seeing Fed members come out, today, we had speak, yesterday as well, really just confirming the fact that this is a Fed that really wants to ensure price stability. And that is likely going to come at an economic cost.

JULIE HYMAN: I'm always fascinated here, Laura, where the Fed essentially says the same thing, then repeats it, and the market reacts completely differently, right? And that doesn't-- I know that your focus is EMEA, so that doesn't just happen here it happens with regard to the ECB and other central banks too. What gives?

LAURA COOPER: Well, I think it's a great kind of context right now in the fact that we are actually seeing central banks deviate away from forward guidance. So it leaves markets with a little bit more uncertainty about the path going forward. So if we look at both the Fed and the ECB are data dependent.

So we would expect that that sets up for a greater bout of volatility, notably, until we get those September meetings, because we are still seeing inflation pressures come into the upside in the US, as we just had that ISM services print, does suggest that growth still remains fairly resilient, whereas in Europe it's quite different. So it's really a backdrop where this data is going to dictate what central banks are going to do. So that leaves markets trying to guess, which is underpinning this volatility.

BRIAN SOZZI: Laura, do you think markets here in the US are underpricing the probability for an economic hard landing in Europe?

LAURA COOPER: I think, well, I mean-- in Europe, I mean, that's a great question. I think our base case is that we're likely going to see a recession come through in Europe on the back half of this year. Certainly, the Q2 data didn't suggest that just yet. There is this resiliency in Europe.

But if we think about the PMI indicators are coming in softer, we did have unexpected contractions in France and Germany, and as well, if we look at consumer sentiment, this is deteriorating quite markedly. That does set up for quite a challenging backdrop through the latter part of this year. I think there's pockets where markets are not accurately pricing that in-- notably, equities, which is one of the reasons why we actually prefer to take exposure in credit over equities at this current juncture.

BRAD SMITH: For those who do have exposure in equities, though, and perhaps those equities' names that they're invested in also have a significant exposure into Europe, what would you be advising them in their own strategy right now?

LAURA COOPER: I think it's really all about a case of being quite selective. So we still advocate for a barbell approach in portfolios. But certainly, what we are seeing is that there's likely the need to be a little bit more tilted towards the defensives. If we look at what came out of the recent earnings season, notably, tech was fairly resilient. We did have better than expected earnings come through there.

That does advocate for what we expect to be really these secular underpinnings going forward of a robust demand backdrop. So we would want exposure there. And it's more of the defensive sectors-- you think about health care, utilities, staples-- I think it's really hiding out in that type of environment, regardless of whether we see a downturn in Europe, which is our base case, and the US potentially more so later next year.

JULIE HYMAN: There's one other thing that you guys recommend as a hedge for tail risks that stood out to me, and that's gold. And it stands out to me because it hasn't worked so well, right, as a hedge thus far this year. Is it more just insurance to hold in case something truly outside the pail happens?

LAURA COOPER: That is the case. I mean, I guess it's the context of how we perceive a hedge. So if we see it as an inflation hedge, it certainly hasn't worked out that way. But in this environment where we have actually seen real yields take quite a bit of a tumble since mid-June, that has provided a little bit of a tailwind to gold.

But when we think about it, it's more of a diversifier in portfolios. So it's not our base case that we are going to see an escalation of geopolitical tensions or a material severe recession in the US. But you'd want to have that exposure in portfolios should any of those tail risk scenarios materialize.

BRIAN SOZZI: BlackRock Senior Macro Strategist for iShares EMEA, Laura Cooper. Always good to see you. We'll talk to you soon.