Inflation: ‘Nothing is off the table’ for the Fed, strategist says
Deutsche Bank Wealth Management CIO for the Americas Deepak Puri joins Yahoo Finance Live to discuss June consumer price index (CPI) data, rising inflation, Fed interest rate hikes, volatility, and the outlook for markets.
Video Transcript
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BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. Another red hot inflation report this morning. The consumer price index, CPI, rising 9.1% in June. That is the highest rate in 41 years. Let's break it all down with Deepak Puri, who is the chief investment officer over at Deutsche Bank's International Private Bank. Thanks so much for taking the time here with us today. First and foremost, just wanted to get your headline reaction to the reading of today's CPI print.
DEEPAK PURI: Yes, good morning. Thanks for having me. I think a couple of takeaways. A, that the US average consumer still won't have any refuge from higher cost and price pressures for anytime soon. And this pain is going to be felt broadly. Secondly, it seems that the price pressures are, again, not just goods inflation or service inflation, it's more broad-based than what we initially anticipated. And thirdly, the Fed really has a tough and much narrower path to what I would call soft landing that was previously expected. So, all in all, a pretty disappointing read. We were hoping that this what might plateau a bit. Might go up, but still avoid a nine handle. And that wasn't to be the case.
JULIE HYMAN: Deepak, it's Julie here. Our reporter who tracks CPI and the Fed for us just pointed out that there is now a 30% chance being priced into Fed funds futures of a 1% increase in rates at the Fed's next meeting on the 27th. How likely do you think that is at this point?
DEEPAK PURI: Well, nothing is off the table anymore, Julie. You know, it's market dependent. The Fed is very data dependent, as they have said. They really want to gain the credibility of the consumers of the investors. And I think they're going to do. And if that warrants a painful, you know, 1% increase, it might so be it. I mean, a good thing to look at this is to see where we have come since March 16th of this year. In less than four months, we have seen 175 basis points of rate increase.
Normally, for us to have that kind of a rate hike, it would normally take 18 to 24 months. In 2015, it took almost 18 months for us to get to that level. So the Fed has to now be very aggressive front loading, which they have really telegraphed to the markets, and just going with that sort of thinking of 1%, and later this month, or a 75 basis points in September is not off the table.
BRIAN SOZZI: Deepak, clearly, inflation is proving to be very sticky. The Fed might have to move quicker on rates. None of that sounds good for the markets. What should investors be doing off this?
DEEPAK PURI: Yeah, and I think that's the way the anatomy of a bear market comes into play, Brian. You want to make sure, A, that you're not preemptively starting to position your portfolio for rate cuts. That might-- I think the markets right now is too eager to talk about the 2023 rate cuts. Before we get there, we'll have to go through a lot of volatility. We haven't really seen bottom-up earnings estimates reflect the slowdown that I think we're going to see later this year, going into 2023.
So, think about when you're doing a discounted cash flow, the rate, which is really the Fed funds rate, the discount rate has been there. And we have now a higher rate to discount future cash flows. So you have a lower present value. But the cash flows needs to be adjusted as well. And we are not there yet. So I think we still have some further downside to the market. Having said that, I don't want to completely discount some of the positives that are still with us.
One, that the equity market gets to its lows way before the economic activity troughs. So that's one positive. Corporate fundamentals are still in relatively good shape. So remains to be seen what kind of earnings destruction we're going to see. And those two things call for somewhat of an underweight for showing your risky assets, but not shun any particular asset class. Stay defensive for the time being. I think the portfolios have been oscillating between inflation fears and recession fears.
Right now, with today's CPI print, obviously, the inflation fears have a leg up. But I think later this month, later this summer, you're going to start seeing the defensives come into play. Last one month, healthcare, consumer staples, utilities have done well. And I feel those would be the areas that will continue to do well if growth is at a premium and we are seeing a slower growth environment.
JULIE HYMAN: I would take the flip side of that for just a moment here. What areas of the market-- you said you shouldn't shun any areas of the market. But what areas of the market are of most concern here? And I'm talking about in equities or in other assets for that matter?
DEEPAK PURI: Yeah, good question, Julie. I think any company that had the luxury of tapping into markets and getting a line of credit at a very low cost, which was the case only a few months ago, but did not really have sustainable earnings or a post-COVID business model needs to be avoided. And also, the darlings of last bull markets, and here, you have four or five various categories of investments. They range from pure speculation to somewhat of a high beta place. It could be the meme stocks, the retail driven names. It could be the parts of the innovation economy.
Not everything in the innovation economy is going to resonate and would have a long-term shelf life. So those are the kind of things. You know, I think the default rates are going to go up, Julie. The cost of credit is going up. So you really want a more viable business model with companies, rather than just being able to sustain your business model because of access to cheap capital.
BRIAN SOZZI: Good points right there. Deepak Puri, chief investment officer at Deutsche Bank's International Private Bank, good to see you. We'll talk to you soon.
