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Inflation ‘the biggest political challenge’ for Biden: Market strategist

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Matthew Miskin, John Hancock Investment Management's Co-Chief Investment Strategist, sits down with Yahoo Finance Live to break down inflation forecasts while dealing with volatile markets this summer, the Fed's interest rate hikes, and managing gas and oil prices.

Video Transcript

DAVE BRIGGS: Are the markets taking a deep breath and saying despite some-- a rough couple of weeks, we've seen the bottom?

MATTHEW MISKIN: We think there's going to be more chop and more volatility here, as we're working through one of the most hawkish periods we've seen from the Federal Reserve in modern history. So we're going to have three 50 basis point rate hikes. At least that's what the FOMC minutes are likely saying, and also the Fed fund futures are pricing in right now. But we actually think they're going to pause after that, doing QT and more rate hikes. That's probably going to be enough, but the bond market is pricing in more rate hikes today. We think that's going to keep equities volatile until we get through these summer months. And then we could potentially see further upside.

SEANA SMITH: So, Matthew, we're going to be talking to Brian Deese, the White House economic advisor, a little bit later on in the program. But when we take into account, I guess, trying to figure out whether or not we've seen peak inflation-- that's one of the questions that he and the administration are facing day after day-- from your view, do you think we've seen peak inflation?

MATTHEW MISKIN: We do believe that on a year over year basis, we saw the peak earlier this year around February. And the comps are going to be high. I mean, we're lapping now really high inflation. This is reopening-- or yeah, reopening 1.0 was this time last year. And that was after all that stimulus that we had and, really, the coming back of the economy. And so, the comps are going to be the reason why we see actually inflation decelerate on a year over year basis. But it's still firm on a month over month basis. Energy prices are still elevated, so that headline number is still going to be tough to bring down materially. But we do think the worst is behind us at this point.

DAVE BRIGGS: Matthew, what do you make of the president today meeting with the Fed chair? Is this just optics? Or is there more to it?

MATTHEW MISKIN: I think there's more to it. I mean, I think the government side, they're supposed to be two separate entities here. And they really shouldn't be having too much discourse. But at the end of the day, inflation is the biggest political challenge that is out there. And I think what the administration is focusing on is having the Fed bring down inflation. I think what the administration is missing a bit on this is that to bring down inflation, they've got to bring down the economy. And that is going to bring forward a lot of other political problems for the administration.

So they need to be careful not overemphasizing tightening policy. We actually would think that if you did cut more rate hikes here and actually pause, that might be a better course of action, both politically and for the economy overall.

DAVE BRIGGS: I'm sure you read the Biden op-ed in the "Wall Street Journal." Is there anything the administration is doing or has talked about that you believe can bring inflation down, or is this solely in the hands of Jerome Powell?

MATTHEW MISKIN: It's going to be tough at this point, but I think you can do incremental policy to help, for example, the energy sector and gas prices come down modestly. I mean, I think you've got to think about energy and power resources more broadly, holistically, and thinking about how to support those industries to make sure that we're not overly reliant on certain places or things in terms of the energy market.

So it's not something easy to do overnight, but it's things that if you put forward a plan on the energy side, you could see the markets reprice that. And that would be really beneficial and helpful in a time where there's a lot of uncertainty of where we're going to get energy from. And given the global geopolitical risks right now, you need to kind of take the lead and come up with some pretty good solutions.

SEANA SMITH: Well, Matthew, talking about energy, taking a look at crude today, crude right around $115 a barrel. I guess, how much more room to the upside do you think we could potentially see with crude until we see a little bit-- so until we see some relief in the price?

MATTHEW MISKIN: Well, it's been an amazing day in the oil market. I mean, everyone is just totally focused on the oil market. And I think it's rightfully so. I mean, it's driving global markets. And I think 125 at the high that we already reached hopefully can be kind of another ceiling, a double top ideally. But if oil prices keep going up, that means the Fed is going to be tighter. And that means it's more likely to be a hard landing versus soft landing. And that drives inflation.

And so, even today, you saw a headline-- early this morning, oil was up about 3%, 4%, and then it's actually come down to about flat relative to where it started, but it's still high. And really, it's just even a rumor of greater production from OPEC+ or other parts of the world that have excess capacity. And that's what we need. We need greater production globally of oil to help manage the skyrocketing prices. And if you get any news of that, I think that's going to be really beneficial and hopefully put a bit of a ceiling here on oil prices.

DAVE BRIGGS: But is there anything that comes close to counteracting Europe halting 90% of crude imports from Russia by year's end?

MATTHEW MISKIN: It's going to be hard. It's a big challenge. And, you know, I think that globally, you need to see Saudi Arabia step it up. The United States is already stepping it up, but it's actually exporting a lot of its oil. So that's not really helping the US as a major consumer. But yeah, you need to see a lot of other parts of the world increase production. And then, demand wise, we've already had demand not really come back as quickly. China was in lockdowns. And the price never even backed off at all with China lockdown.

So I think you've got this recipe for a tight oil market, one that really would love to see some relief on the production side, the supply side. And any kind of de-escalation on the Russia-Ukraine news would be certainly a welcome development. And then that would also, of course, help the oil price-- oil prices take off some of those run that it had seen recently.

SEANA SMITH: Matthew, you mentioned earlier that you're expecting volatility to continue at least over the next couple of months. So, so far, this year, we had the Dow off just around 9%, S&P off around 13%. People who are looking to put money to work, should they be putting money to work right now and where?

MATTHEW MISKIN: Yeah, so we are taking out our late cycle playbook, and we believe we're reaching a late cycle environment. And there is actually really good opportunities in late cycle environments. But you've got to think a bit of inversely of your typical market cycle playbook. So thinking more about high quality investment options, bonds are actually-- we think is going to represent an attractive entry point, as the economy slows into the back half and into 2023, that dependable income stream, higher quality nature and lower default risk.

And then also, in the US equity market, high quality stocks have been really underperforming. They usually like a slower growth environment. And we think we're going to be actually seeing that in the back half. And we like that their valuations have come in beforehand. So look for good quality bonds with-- we're looking at 3% to 4% in yields. Just get that income, sit there, and wait out some of that volatility. And then look for some opportunities in the equity market that have gone on sale, good quality businesses, good balance sheets. Those can help a portfolio as well.