Medley Global Advisors Ben Emons joins Yahoo Finance Live to discuss the short-lived relief rally after the Bank of England announced quantitative easing plans, ETF flows, and the outlook for markets.
AKIKO FUJITA: He's been writing about the dollar vigilantes. Ben, walk me through some of the moves that we're seeing today. What's going on?
BEN EMONS: It's certainly a reaction to what happened yesterday, because I think there's some confusion in the market that happens. The Bank of England intervenes and brings long-term interest rates really down, but that skewed the expectations in our markets. Particularly if you think of interest rates, the Federal Reserve is by far not in a situation to either intervene in treasurys or to, let's say, pivot again back away from tightening.
So that realization set in today that markets are coming back to the point of, wait a minute, the Fed is actually not changing course just because the Bank of England has intervened. So this is why you're seeing the sell-off. And really, as the employment data you highlighted just comes out much stronger, once again, embolden and reinforce the message of the fact that they must stay the course, with this tightening until they do see softening in the labor market. So I think that explains the sell-off, why are you getting such a broad sell-off in different sectors with the consumer discretionary taking the brunt.
AKIKO FUJITA: So you're saying that there was actually a bit of a resetting of expectations yesterday based on what we heard from the BOE, confusion about whether, in fact-- you know, why, in fact, the bank was actually going for quantitative easing at a time when we're going towards QT. I mean, did that really shift the expectation for the Fed?
BEN EMONS: Well, at least the market tried to do that. And that's, I think, where the issue is today. There is a hope and, I think, still an embedded expectation that at some point, the Fed will, quote unquote, "pivot," as we say. It will move away from this tightening cycle-- and not only just decelerate the tightening, but literally stop and maybe look at easing.
And that hope came alive yesterday in quite a big fashion. Because if you have a major central bank like the Bank of England announcing de facto QE program, you know, it lowers real interest rates and affects interest rate expectations. And people take cue from that and willing to take risk.
And that's what that showed with those high flying ETFs that you showed at the start of the segment. They're now down heavy today, yesterday were up big. And so I think this confusion in markets is being reset again by just simply the data that comes out-- good employment data. Tomorrow, we have core PCE, huge number too, because that's what the Fed really looks at in terms of inflation. People have to be wary that the Fed is just simply not done here. And we cannot base investment strategy on what a foreign central bank does in its own market.
AKIKO FUJITA: It's interesting you mention that given the comments that we got from St. Louis Fed President James Bullard today, who said that he believes the market finally got the Fed's message, especially with their most recent dot plot. A lot of questions here about whether, in fact-- what will be the lead driver here if we're talking about US equities specifically.
Is it the Fed? Is it a contagion effect from some of the other central banks we've been watching-- whether that's the BOE, ECB, or BOJ? How are you putting all those pieces together right now?
BEN EMONS: I think it's an interesting dynamic here between the different central banks because now, there is a response building slowly to the strength of the dollar. And ultimately, if the dollar does change in value, meaning it starts to decline, that would, I think, alleviate a lot of pressure that we're seeing in different markets, particularly emerging markets, but even in developed markets.
So the central banks in Asia, for example, have been more and more actively intervening in their local FX markets, as well as now we're seeing it from the Bank of Japan and the Bank of England. And the ECB meeting in the future also is taking note of the strength of the euro and the weakness of the euro. So we're taking this together.
At some point, we're going to see, I guess, a sort of a rhetoric building that the dollar got too far too strong. And there will be something like a, I'd say, concerted communication that they're paying attention to the strength of the dollar. That will be, I think, a big turning point in financial markets.
AKIKO FUJITA: So, Ben, how do you invest in this environment? Do you stay mainly overweight US? Are there some opportunities that maybe investors may be overlooking abroad?
BEN EMONS: Yeah. I think you can play ongoing offense defense is a theme I've been thinking about the entire year. On the one hand, there is opportunity in foreign markets. So many emerging markets have tightened well ahead of the Fed-- like, say, Latin America. And other markets, like in Asia, are reopening.
So there is, I think, equity outperformance in those regions relative to the US or relative to Europe. On the other hand, you have to play, clearly as day like today shows, defense. So you're looking at companies-- they are well-positioned in terms of these environments. Either their balance sheets are really strong, they throw off another cash flow-- that's kind of standard language. But that is, I think, ultimately the real position you want to take against the very, very short end of the yield curve.
Treasury bills are now at acceptable rates again. So you can balance your risk position that way out. I think giving a very, let's say, diversified position, I think you can get through this period that will remain quite volatile and choppy.
AKIKO FUJITA: And finally, you pointed to the release of the PCE data coming out tomorrow, which is, of course, the preferred gauge for inflation for the Fed. You know, what happens if we get a weaker than expected number? I mean, how much of that has actually been baked in? It feels like we've seen these wild swings coming out, especially around inflation data, given that the Fed has said that this is the core focus for the central bank.
BEN EMONS: I think it's a hugely important number. If you look at the data today from the GDP, the price index was, again, higher. But the quarter-over-quarter PCE, which includes spending, was softer than the last time. So I think combine the two, there's still ongoing price pressures in the economy from shelter, from other services.
But the good side of the economy clearly softening. So it will show up in this core PCE number tomorrow. If it does surprise somewhat to the downside, it would be a relief to markets. Because eventually, that's what we really want to see-- a more stable core rate of inflation. Headline will eventually phase out as the energy stocks phase out, but it's really the core inflation that determines inflation expectations.
So it's a big number tomorrow. The initial indication from today's GDP data may indicate we're getting some softness coming through tomorrow at core PCE. But let's see.
AKIKO FUJITA: It could be a rocky ride to round out what has been a very choppy week. Ben Emons, Managing Director for Global Macro Strategy at Medley Global Advisors, appreciate your time today.