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Jerome Powell’s hawkish tone on inflation takes the heat off Fed: strategist

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Shawn Snyder, Citi U.S. Wealth Management Head of Investment Strategy, joins Yahoo Finance Live to discuss the Fed's view on inflation, outlook for airlines and what to expect from markets in the second half of 2021.

Video Transcript

ZACK GUZMAN: I want to turn it back over to markets here, though, as we have been watching the action on the last trading day of the first half of the year. Of course, the Fed, interestingly, in the way that they've been positioning themselves, have bought themselves a little bit more time when it comes to reading some of that inflation data we've been discussing there and how they want to react when it comes to tapering and laying out the timeline there.

And for more on what the back half of the year could look like, happy to bring on Shawn Snyder, Citi US Wealth Management Head of Investment Strategy, back on with us. And Shawn, good to be chatting with you again here. I mean, we were just kind of discussing inflation there.

But you note that the Fed has been handling this so far pretty well in maybe, I guess, navigating the market through their thinking. What do you see, as we're shaping up here to enter in the back half, what the market situation looks like, given their, I guess, positioning right now, and the data that we're continuing to digest in terms of how hot this recovery is running?

SHAWN SNYDER: Sure, I think when it comes to the Federal Reserve, the June meeting was really interesting. But I actually think, in a way, it was positive because it brought the Fed's view of the world more in line with the market's view of the world.

And what's really interesting about that meeting is they didn't actually do anything. They didn't announce tapering. They didn't announce that they were making rate hikes. But by having a slightly more hawkish tone, they brought down inflation expectations. And in a sense, that took the heat off of them a bit. And it gives them a little bit more time to see these labor shortages or distortions we're seeing in price stability possibly disappear by later this year.

So I think that was very smart of them. As far as what's going to happen in the back half of the year, in terms of the Fed, I think they're going to look closely at the labor market. We had the ADP report come out this morning. I found it encouraging, 692,000 jobs. But about 48% of those jobs [INAUDIBLE] the hospitality sector. And that's the sector that has been hit the hardest. It makes up about a third of the jobs that we've lost since February 2020. We're still 7.6 million jobs below where we were in February 2020.

So to me, seeing some of these enhanced unemployment benefits potentially expire June and July in some of the states and federally by September, schools reopening, I think there's a chance to get a much stronger labor market headed into the fall. And I think that's when we'll get more announcements out of the Fed.

AKIKO FUJITA: I mean, to what extent do you think those enhanced unemployment benefits have distorted the jobs picture overall? We've got a number coming out on Friday. What are you anticipating on that front?

SHAWN SNYDER: So my colleagues in Citi Research are expecting above consensus print of about 860,000. But I do think if you look at small business data, there's a wide variety of small businesses that are reporting that it's very difficult for them to find labor. I know I personally have went through a couple fast food places where the lobby was closed with signs saying, we can't have the lobby open because we can't find employees. So there is definitely some distortions going on. It's hard to say what is the exact amount. But I think it's obvious that there is something going on related to that.

ZACK GUZMAN: Yeah, when it comes to the performance of the back half and what we're expecting there, we have seen some people up their year-end forecasts. Fundstrat would be one of those that I saw up by about 7%. When you look at maybe the relative outperformers, though, it has been energy and financials going one, two in the front half. How are you looking at maybe reallocate and what you expect when it comes to, I guess, sector leaders in the back half, if we continue to see this rotation in growth and cyclicals and back and forth again?

SHAWN SNYDER: Sure. So, you know, I still think energy and financials are a decent place to be. And I think that even though we've seen the 10-year Treasury yield decline over the past three months, as those inflation expectations came down a bit, I still think the odds are that yields will move higher over time. And maybe 10-year Treasury yield ends up closer to 2% by year-end. So I still think those sectors that are sensitive to interest rates, which is energy and financials, I still think makes sense.

As far as other sectors, what we're looking at is moving a little bit away from the US and more towards areas that haven't recovered fully. So in the US, if you talk about sectors, I would say airlines, leisure, and hospitality have not fully recovered yet, compared to where they were prior to this pandemic. So I think there's still room to run there. I think if you look at UK equities, they trade at a significant discount to the United States, but have a lot of exposure to energy and financials as well and the sort of value plays.

And one of the things that just is sort of part of the nature of this crisis that we experience is that it's a rolling healthcare crisis. And it's been the same thing with vaccines. The advanced economies are getting the vaccines first. And then eventually, other areas will get it as well. So this reopening trade that we've talked so much about in the United States will eventually occur in other areas as well.

So if we talk about Delta variants in India and Brazil, and, you know, they're tragic, but I do think vaccination campaigns here that turn into vacation plans will eventually occur elsewhere. So I think the idea of being home biased towards the US, I think as we transition further along, the US moves into a mid-cycle expansion, you should look to other areas that are going to be experiencing this strong V-shaped recovery that we just felt now.

AKIKO FUJITA: Yeah, some good takeaways there, important context. Shawn Snyder, Citi US Wealth Management Head of Investment Strategy.