U.S. markets open in 8 hours 15 minutes
  • S&P Futures

    4,222.00
    +8.25 (+0.20%)
     
  • Dow Futures

    33,833.00
    +72.00 (+0.21%)
     
  • Nasdaq Futures

    14,143.75
    +13.75 (+0.10%)
     
  • Russell 2000 Futures

    2,284.60
    +3.70 (+0.16%)
     
  • Crude Oil

    73.63
    -0.03 (-0.04%)
     
  • Gold

    1,787.30
    +4.40 (+0.25%)
     
  • Silver

    26.00
    -0.02 (-0.10%)
     
  • EUR/USD

    1.1905
    -0.0020 (-0.17%)
     
  • 10-Yr Bond

    1.4840
    0.0000 (0.00%)
     
  • Vix

    17.89
    -2.81 (-13.57%)
     
  • GBP/USD

    1.3906
    -0.0027 (-0.19%)
     
  • USD/JPY

    110.4360
    +0.1380 (+0.13%)
     
  • BTC-USD

    32,844.31
    -1,119.64 (-3.30%)
     
  • CMC Crypto 200

    791.08
    -59.26 (-6.97%)
     
  • FTSE 100

    7,062.29
    +44.82 (+0.64%)
     
  • Nikkei 225

    28,894.06
    +883.13 (+3.15%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

The Fed worries ‘stocks will bubble’ if markets don’t pause

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Jim Caron, Fixed Income Portfolio Manager at Morgan Stanley Investment Management, joins Yahoo Finance Live to discuss the next catalyst for inflation and weigh in on the outlook for markets post-pandemic.

Video Transcript

JULIE HYMAN: Jim, it's good to see you. And you were sort of reframing the inflation thesis between anchored and de-anchored. In other words, is it going to be-- you say it's going to be risk, no matter what. It's just a question of how transitory it's going to be. So talk to us about why that framing is sort of useful and important for people.

JIM CARON: Sure, thank you. And good morning, Julie. And thank you for having me on your show. I do think that the debate is very, very important. And the way that we think about it and frame it is also very, very important. Because the way that I hear it discussed is that, well, inflation is a risk. Well, of course, it's a risk. It's always a risk. But really, what the Fed is concerned with is, if inflation is anchored or de-anchored, meaning that we all understand that this period that April and May is going to show very strong inflation prints. We know that's going to happen.

And, you know, clearly, the most recent print was a little stronger than what most people had expected. But we also expect this to be the peak in the inflation print and that it's going to start to go down starting in June and July and August and throughout the rest of the year, and end the year somewhere around, if I look at core PCE around 2.12 to 2%.

So the question for the Fed is, is this movement higher in interest rates, is this anchored, meaning that can they bring this back down? Or is it naturally going to fall back down, just based on the state of the economy? Or are we in a situation where the psychology has changed in that prices are going to start to go up consistently, not just over the next month or two, but over the next several quarters and several years, such that it starts to get ingrained into people's psychology that they better start buying goods now, because the prices are just going to be higher later?

So if inflation is anchored, as the Fed believes and as I believe it is as well, then that means that this spike that we're seeing right now will ultimately be transitory. It'll pass. It'll come back down, and that it's not going to pose a systemic risk or regime change risk for higher inflation into the future.

BRIAN SOZZI: Jim, peaking inflation-- that's somewhat of a contrarian take, relative to what the market has been thinking. So how are your portfolios positioned into June?

JIM CARON: So the way that we think about this right now is, like, well, let's take a look at the 10-year Treasury, first of all, right? The 10-year Treasury is trading around 1.6% to 1.65%. It really hasn't moved very, very much. So even though we got these really strong spikes in inflation, just in terms of the prints, the point is, is that it's all in the price. It's all very, very well expected. So what we've done here, given that we've known-- the market has known that inflation was going to come up and was also going to spike around this period of time, is we were underweight duration going into all of this. We started to take that underweight off. We started to get back more towards neutral duration.

So we're not really playing a movement in interest rates at this point. What we're waiting to see is the next catalyst. I don't know what that is. It could be that wage inflation stays sticky and continues to move higher, and it doesn't fall down, as we expect. It could be that there's more demand coming into the economy than even what we're forecasting.

Don't forget, we're already forecasting an above 10% second quarter in GDP this year. And it's going to come in close to 8%. So we're expecting a lot of demand. But is there going to be a surprise that tells us that there's even more coming? So until we see what that catalyst is, it's going to be hard for us to be materially underweight duration until those factors materialize.

JULIE HYMAN: Yeah, it's going to be very interesting to watch all of the prints from now until then. Just want to pause for a second and say that we are approaching the opening bell here this morning. It looks like we're going to have a higher open on this Friday. Big crowd there to ring the bell with BMTechnologies, which listed on the exchange recently. It's a digital banking platform. And you can see here there the company also reported earnings not long ago. So they are ringing the opening bell here this morning.

Jim, let's go back to you and to this discussion that we are talking about with inflation or not inflation and how one positions oneself. Let's bring the Fed into this as well because we got, I should say, a very slight tweak, I guess, to tone coming out of those Fed minutes that, you know, yes, they're going to taper at some point. It still doesn't seem like it's happening any time soon. But is that something that investors need to really be keyed in on?

JIM CARON: Yeah, so it's what we jokingly say is that the first rule of tapering is that you don't talk about tapering at the Fed. And essentially, what they did is they actually started to talk about it. Now what we have to remember is that these are the minutes of the last FOMC meeting, where what they were really operating off of was the March-- was March data and early April data, which was very, very strong. So-- and also, what we have to recognize is that there are financial stability risks.

So I think what the Fed is trying to do is make this a two-way discussion, that they don't want the markets to think that the Fed is just going to be patient, don't care about the risks, and they're going to let things just run hot. They want the markets to have a pause and make this a two-way discussion, make this a real debate, such that financial assets don't become overly frothy and get into bubble-like territory, where that could create its own financial stability risks. And I think they're trying to avoid that.

So by starting to just whisper about this right now, this is a key point. The other thing is that at the June FOMC meeting in the middle of June, this is going to be everything that the press talks about in the Q&A session with Jerome Powell. Everybody's going to be talking about this. And I don't think he's going to mention anything about tapering so soon.

I think that this will probably come out in late August at the Jackson Hole Symposium, where some white papers get written and they start to talk about the concept and idea of tapering. And it might get announced at earliest officially at the September FOMC. But tapering might not get put into action until late 2021 to early 2022. So even though it was mentioned, the timeline for all of this hasn't changed in my view.

JULIE HYMAN: Gotcha.

BRIAN SOZZI: Jim, I don't know if you saw it, but that opening bell took me by surprise. All the folks there in the New York Stock Exchange-- I haven't seen a crowd like that in a while down there. Are you back in the office? And do you think it's important for your teams to be in the office and communicating, ahead of what could be, really, a volatile summer, just given all these inflation risks and the concerns around what the Fed does next?

JIM CARON: Yeah, so I am back in the office, not every day. But we are taking-- we're doing is, like, two, three days a week, one or two or three days a week. Not a full five days-- we're trying to still respect social distancing and get more guidance from the CDC in terms of what we're supposed to do. We're being still very careful.

So I do think that it is important to have a team dynamic where Zoom is nice, but I think that sometimes being in person and having conversations by the water cooler and also being around the younger people so that they have an opportunity to learn and also just experience what's going on more through osmosis is important. So what we like to say is that you can sustain a business for a while working remotely, but you can't really grow a business that way. And we do want to grow the business. So we do think it's important that everybody gets together as much as possible, going into the future.