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Inflation: The Fed ‘is paying attention to trends,’ strategist says

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Citi Global Wealth Head of North American Investments Kristen Bitterly joins Yahoo Finance Live to discuss the likelihood of a recession, the state of the economy, market volatility, consumer spending, and the outlook for Fed policy.

Video Transcript

[MUSIC PLAYING]

- Welcome back, everyone concerns of a recession are looming over investors, as the Atlanta Fed now estimates Q2 GDP will contract by about 1 and 1/2%. That's negative 1 and 1/2% is what they're projecting there. Plus, over the weekend, a Moody's analyst said that they are hearing more recession talk than ever before. For more, we welcome in Citi Global Wealth head of North American investments, Kristen Bitterly.

Thanks so much for joining us this morning, Kristen. The likelihood of a recession at a time of employment growth in the data as well right now. Should we expect just a technical recession based on GDP contraction or a real recession with wider ranging implications?

KRISTEN BITTERLY: So I think the question of a technical recession versus a real recession, we all know and we're all learning and reminding ourselves of what actually constitutes a recession in terms of the depth, diffusion, in terms of real contraction of economic activity. We certainly are in there yet, so if we see a technical one that could certainly happen. But I think the bigger question right now is really the balance of the Fed's trajectory and what they continue to do, as well as the strength of the consumer.

Those are the two things that we're really going to be balancing out, and unfortunately, in terms of the data, and you mentioned this earlier in the program, the Fed is paying attention to trends. They're not going to look at singular data points, and so to really have clarity as to whether we tip over into a recession and we would see that out in 2023, we're going to need to wait for the next couple of months.

- Kristen, the rates on inflation that we have gotten have been and they have continued to be shocking. You don't think that warrants a more aggressive pace of tightening from the Fed?

KRISTEN BITTERLY: I think it's going to keep the Fed on the trajectory that it's currently at, right? So in terms of 75 basis points clearly on the table and that is our base case, we're seeing some abatement obviously in terms of whether it's gas prices, whether it's the commodity sector. I think the tricky part within inflation right now is really the owners equivalent rents and looking at overall shelter costs. That's a part of the equation that has a lag and does have some stickiness to it.

So the Fed has to really thread this needle in terms of determining what they have control over, what they don't have control over, and whether the medicine that they're providing is really the appropriate cure for the illness that the economy is currently experiencing.

- So Kristen, whether they raise 75 basis points, whether they raise 100 basis points, what they continue to do this year, are you as sort of glued to those small signals that they tend to give in their statements and to how much they're raising or do you think that are you and do you think investors should be more focused on just the general trajectory that rates are going up?

KRISTEN BITTERLY: I think that investors, you must have to say, how do I prepare my portfolio for what could occur from here? So when we look at the percentage probabilities of whether we're going to tip over into a recession or whether we're just going to see this slowing growth environment, we give the slight edge to the slowing growth environment simply because of the strength of the consumer coming into this.

But how do you prepare your portfolio for both of those situations and it's actually creating some strong diversification within the portfolio across both fixed income and equities, and really leaning into quality and being relatively conservative when it comes to either stretching for yield or extending yourself when it comes to credit. So I think there is a portfolio solution here as an investor to remain fully invested, but ensuring that you have raised quality across both equities and fixed income.

- We've already started to get some earnings out with banks really kicking things off and a few airlines as well. What types of either guidance forecast revisions might you be looking out for even as we move on throughout the rest of this earnings season?

KRISTEN BITTERLY: Yeah so as we're looking at earnings, I mean, our expectations are roughly in line with analysts that we see around 4.6%. I think the one thing though to look through to in terms of earnings is when you strip out the energy component of that and the energy sector, you're actually looking at negative earnings growth. And so a lot of this has really been priced into the market overall. We certainly have seen that in terms of certain sectors and the expectations coming into earnings season.

I think it's kind of looking out into the second half of the year and the forward guidance is what's going to be most critical, and again, it all points back to consumer because the consumer is 65% to 70% consumer spending is that percentage of GDP. And also looking at what constitutes durable demand. This is the key question across all sectors. Understanding that if consumers are making those decisions in terms of their spending and recognizing that real wages have actually declined, where are they spending, how are they spending, and what is that forward guidance for the second half of the year?

- All right, well put. Citi Global Wealth head of North American investments Kristen Bitterly. Always good to see you. We'll talk to you soon.

KRISTEN BITTERLY: Good to see you too.