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Fed's rate hike success is dependent on 'collateral damage' in job markets: Analyst

eToro USA Investment Analyst Callie Cox joins Yahoo Finance Live to discuss the Fed's most recent rate hike and what it will take for it to have a meaningful impact on the U.S. economy.

Video Transcript

DAVE BRIGGS: Well, for more on the markets, let's bring in eToro USA investment analyst Callie Cox. Nice to see you. We will talk about the Fed. We will talk about the bond yields. Let's start with the 30,000 foot view of the FedEx earnings coming out early. Given what we saw with the pre-release, what does it tell you about the macro economy? It was Raj Subramaniam, their new CEO, that said, we are a reflection of everybody else's business. So what does it tell you?

CALLIE COX: Man, he took the words right out of my mouth. I mean, I'll say it to you. It's a reflection of how tough the operating environment is right now, especially with companies who have that global exposure. And obviously, FedEx has exposure to global trade and global shipments. I mean, that's one of the biggest worries for us right now.

And we're generally an optimistic research team, but the fact that rates are so high, costs are so high, and there are so many changing parts, that's just not an easy environment for any company to navigate, much less some of the smaller, more speculative companies that have been in favor over the past year or so.

SEANA SMITH: So, Callie, what does that mean, then, for the next couple of months? I guess, how big of a slowdown do you think we are likely to see, and how will that be reflected in equities?

CALLIE COX: Yeah, that's a tough question because I think the degree of the slowdown is something that everybody's questioning. I mean, right now, we don't see it to be so much that we hit a severe recession. But honestly, with what Jay Powell said yesterday and how hard they're going to have to hit that hammer to get inflation down, I mean, we could see a bigger slowdown than we thought.

It really depends on, A, how high rates go from here, B, how quickly the Fed can get inflation under control, and C, how much collateral damage we'll have to see in the job market. But right now, those are the three things we're watching. And honestly, that correlates with what we're expecting in the markets ahead.

RACHELLE AKUFFO: And you've called this a battle tested market, a lot of negative sentiment. Do you expect that to change, or perhaps is it overly negative? Are they pricing in the risks correctly right now?

CALLIE COX: Well, the mood is extremely negative. I mean, if you look at the AAII numbers that came out today, we saw, like, the fourth or fifth most bearish reading in, like, decades or so. I mean, both retail and institutional investors, even though some are holding on, they're still incredibly fearful of the environment. And honestly, this is a battle tested market. We've seen all the headlines that this market has made it through this year. So in our eyes, that's a great thing. It doesn't necessarily preclude us from dealing with that slowdown that Seana mentioned.

But at the same time, it does keep investors in check a little bit. It does keep investors hedged. They might be on the sidelines more than they are taking risks in these markets. And that puts a bottom in the stock market. It means that if we see any better than expected headlines-- and the bar is low right now, by the way. If we see any better than expected headlines, we could see investors rush in, and as a result of that, see those quick relief rallies.

DAVE BRIGGS: And to the bond yields, which Rachelle mentioned off the top, in particular, the two-year '07 highs, tells you what about the pain to come?

CALLIE COX: Well, that's a psychological thing. And I think about this a lot on my end. I mean, the fact that short-term rates are so high right now really makes the decision difficult when you're looking at investing for the long-term, the duration if you will, investing for the long-term versus picking up those rates in the short-term. I mean, for so long, we had such low short-term rates that it was almost a given to people to extend their risk across the curve and put their money out there and take on that risk, the TINA trade.

But now it's not so obvious. And we see rates moving up in savings accounts, too. I mean, we get a lot of questions from our customers just about the balance between stocks and cash and how you can actually make a decent rate on cash now.

SEANA SMITH: Callie, do you see the rising rates, do you see that trend easing at any point soon?

CALLIE COX: Well, so the 10-year growth, 3.5%, I was really shocked by that. That seemed to be a pretty strong technical level. So from here, I think it's really hard to tell. I think it's going to depend on the Fed's pace and just exactly where they stop with rate hikes.

RACHELLE AKUFFO: And I want to ask you. Obviously, we have the strong dollar. You have some of these economic headwinds coming out of Europe. How does that mix into this stew of what we're looking at and how it might impact the US markets?

CALLIE COX: Yeah, well, it just [INAUDIBLE] of what the Fed is trying to do here because, obviously, while the Fed is hiking and while the US is on the growth path it is right now, the dollar is going to get stronger. And unfortunately, the effect of that is it crushes the euro, and by extension, European growth. It almost effectively exports our inflation over to Europe.

And like I mentioned at the beginning of the call, I mean, the global economy is just so interconnected these days. So you have to really watch the currencies here because we have a lot of companies with overseas markets and a lot of European exposures. So what we've been telling customers is to really understand what they're investing in, and to know even if they are US investors, they probably have some kind of European exposure there, and they should be watching the dollar.