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Inflation: 'Investors are pricing in a less hawkish Fed', strategist says

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Tom Hainlin, U.S. Bank Wealth Management Global Investment Strategist, and Michael Purves, Tallbacken Capital Advisors Founder and CEO, sit down with Yahoo Finance Live to discuss market reactions to Fed rate hikes and declines in GDP, inflation, and Amazon earnings.

Video Transcript

[MUSIC PLAYING]

[BELL]

[APPLAUSE]

DAVE BRIGGS: All right, there is your closing bell on Wall Street. What a rally it was initially. Now when that negative GDP print came out, they fell and then rallied right back. And we closed up 329 points on the Dow, up more than 1% on the NASDAQ, and the S&P up 1.2%, looking to their strongest month of the year.

Joining us now for more on the markets, US Bank Wealth Management global investment strategist, Tom Hainlin, and founder and CEO of Tallbacken Capital Investors, Michael Purves. Good to see you both. Michael, we'll start with you. What do you make of this rally after news that we would have the technical definition of a recession, two straight quarters of GDP contraction?

MICHAEL PURVES: What's also striking about today's price action is that if you look at every FOMC day, the market rallied. And every day after that, over the last several FOMCs, the market gave back what it earned the afternoon prior. And so today, you have a very different type of price action. And as you were just suggesting, you do have the sort of unsettling GDP print.

With that said, I think the GDP prints are not going to be moving the markets too much of a way because you still have this very confusing and complex collision of financial data where unemployment data is still strong. The PMIs are still in the 53 to 55 range, depending on which one you're looking at. And there's a lot of good things happening in the economy, along with some sort of bad things.

So I think it's-- I think what is really important here and what's sort of really explaining the rally today, the followthrough, why it's different than the prior post FOMC rally-- or post FOMC sessions is that we got into sort of peak hawkishness, if you will.

And while the inflation story was going to be around for some time, obviously, what the market is sort of saying is that, yeah, we get it, and that we are now seeing 10-year interest rates coming in 11 basis points of the day, too. So that's going to really help stabilize the table for buying risk assets like equities.

SEANA SMITH: Tom, what do you think? We heard from Fed Chair Jay Powell yesterday saying that we're not in a recession. President Biden was also reiterating that today, trying to convince Americans that we are not in a recession. What do you think?

TOM HAINLIN: Yeah, a lot of debate on the definitions of what is a recession. But it certainly doesn't look like something like a traditional recession with the labor markets being as healthy as they are, unemployment claims. The things that normally happen during a recession, you're not seeing that take place.

So for us, we're focused on the Fed and the reaction function to inflation. And the melt-up and risk assets over the last couple of days seems to be investors pricing in a perhaps less hawkish Fed. And that's not necessarily our take. We think that understates the resolve that the Federal Reserve has in taking down inflation.

We'll get more information tomorrow on the inflation from PCE. And then we'll also get the employment cost index. And we think that still sets up a material risk that the Fed remains hawkish well into 2022 and possibly into 2023.

RACHELLE AKUFFO: And so, Michael, with this environment where you have the Fed saying, look, they're willing to do what they need to do to get inflation down, but you also heard some of these signs of a slowing in some of the rate hikes as well, what are some of the questions that your clients have right now?

MICHAEL PURVES: Well, I think, look, the spectrum of sort of unanswerable questions has been very, very wide for some time. And of course, the biggest question is, is, how much inflation. We have this more-- this perception that the Fed is kind of, like-- really has wrapped their arms around inflation. And if you look at money market futures, contracts, they're pricing in 50 to 75 basis points of cuts next year, which sounds like recession, but it also sounds like stability at the bond market.

So I think one of the things that I think is really important is that if you look at that horrible, ugly CPI print we got a couple of weeks ago, the bond market didn't really move much off that at all, as ugly as it was. And the prior print was less ugly-- still ugly, but less so. And the bond market moved pretty violently off that.

So I think what we're seeing here is, is that the market is kind of really acclimated to this idea that the Fed is kind of, like, certainly pulling out all the stops to tackle this inflation. And as they've done that, we may get some recessionary and economic contraction dynamics playing out in the economy, but that the-- maybe these dips are a lot safer to buy than they were earlier in the year because the earnings data that we're getting is still pretty good. And so you're looking at pretty decent earnings coupled with a much more stable, at least for the moment, bond market.

SEANA SMITH: Michael and Tom, I want you guys to hang on just a second. We have Amazon out with earnings. Dan Howley has that for us. Dan.

DAN HOWLEY: That's right. We have a beat on revenue for net sales revenue for Amazon. They came in at $121.2 billion. The expectation was for 119.53 billion. That's also up versus last year, which was 113 billion. They did swing for a loss on adjusted EPS. That's $0.20. There was expectations of $0.52 positive for them. That's versus last year, which is that $15.12, though.

There was that 20-to-1 stock split in the meantime. So we're just digesting the numbers here. Part of the loss, though, they say, goes to a pre-tax valuation loss of 3.9 billion. That's including nonoperating expenses from their investment in Rivian Automotive.

SEANA SMITH: All right, Dan, thanks so much. Bring us any other headlines that you're seeing. Michael, I want to go to you on this because we're seeing the reaction in the stock with shares popping afterhours. Revenue for the second quarter beating the Street's expectations. You can see it on your screen there. But it was the third quarter guidance, it seems like, that has the investors most excited here. Pretty strong outlook going forward. In the face of higher inflation, it looks like a big quarter to us. What do you make of these results?

MICHAEL PURVES: Well, I haven't been through them yet, but a couple of things. If you look at the prior quarter for Amazon, they got pretty beaten up on a lot of sort of the supply chain shipping costs and so forth. And I think that's a tougher thing. But I think what you're sort of seeing here is that some of the ugliest facets of the sort of COVID era inflation are perhaps fading here, right?

And but it's still showing that-- and again, I haven't been through the release, but if the cloud is still pretty strong, that kind of sort of pushes back a little bit on what we saw on the weakness on Microsoft Cloud the other day. And at the same time, if the consumer is still aggressively shopping, that's a good statement about the consumer economy.

So I think some of this Amazon good news, again, it just hit. Let's see how the stock opens and trades tomorrow. But if it is as good as it looks right now, then that's going to certainly have spillover effects into the broader stock market and the tech complex.