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Stocks hugged the flat line Tuesday afternoon as traders considered the latest batch of corporate earnings results and mulled prospects of another robust stimulus proposal getting passed. Head of Fixed Income at Brown Advisory, Tom Graff, and Deutsche Bank Chief US Economist Matthew Luzzetti, joined Yahoo Finance Live to discuss.
SEANA SMITH: Just around 3 and 1/2 minutes till the closing bell. And you're looking at a down market here with the Dow, S&P, and NASDAQ all in the red, although not by a wide margin. We want to bring in Tom Graff. He's the head of Fixed Income at Brown Advisory. And we're also joined by Matthew Luzzetti, Deutsche Bank's chief US economist.
And Tom, let me start with you in the action that we're seeing or really lack, thereof, I guess today in the 10-year yield. And we're really seeing yields hold firm. Lots of focus over the next 24 hours is going to be what the Fed has to say about the recent rise in inflation expectations. I'm curious where you stand on that and what you're expecting to hear from the Fed tomorrow.
TOM GRAFF: Well, I think despite the increase in [? tips ?] break evens, which is probably the best simple guide of inflation expectations, I think the Fed is going to push back against the nascent talk of QE tapering later this year. I think they want to avoid the mistakes of 2013 and only even breathe the slightest hint of tightening once they're really sure they need to do it. It should be that this inflation per average inflation targeting regime does all the talking for them. And they should try to stay silent until then.
ADAM SHAPIRO: Matthew, when some people worry about an overshoot, the flood that might overshoot its inflation target, is that of concern?
MATTHEW LUZZETTI: For us, we don't think so. In fact, it's exactly what they want to achieve. It is their new objective and goal rather than something that they're concerned about. I think that they will have a difficult messaging and communications challenge over the next several months.
In the second quarter, we will get this big pick up in year-over-year inflation rates. A lot of that is due to base effects because we had historically weak inflation since last year. But we may also get some inflation pressures from some pickup in activity for airfares, for hotels, for restaurants. And some of these may show some price pressures as well.
Ultimately we think that's going to be short lived. We think by the end of the year, you're going to be at 1.7% core [? PC ?] inflation. And the Fed will still have a lot of work left to do. So I agree with Tom that I think the key message coming out of tomorrow, it's far too early to talk about normalization from the Fed's perspective, really premature to talk about tapering. And Chair Powell should send a dovish message.
SEANA SMITH: And Matthew and Tom, stand by. We want to bring in our Markets Reporter Jared Blikre, as we count down to the closing bell in just under 90 seconds from now. And Jared, looks like we're losing some momentum here into the close.
JARED BLIKRE: Yeah, still not some big numbers being posted, but you're right. All the majors are now in the red along with the Russell 2000 which was red 30 minutes ago on our last market check here. Let's dive into the market, though. Here's the NASDAQ 100. And all the mega-caps now in the green.
Facebook up 1 and 1/2. Microsoft, which is reporting in just a few minutes literally, up over 1%. Some of the notable losers here. Zoom is down 4 and 1/2%. Pinduoduo's down a similar amount. And ASML, a supplier for chip makers. We got AMD coming. ASML is down about 3%.
So let's take a look at the sector action for today. We had some leadership changes. But you can see communications services there, definitely in the lead, up about 1.3%. Real estate staples and tech and discretionary still outperforming. But energy and materials, those are the biggest laggards. Energy down about 2%.
Now, let's take a look at our banking sector. We still have regional bank earnings trailing in here. You can see mostly red on the board. Financials have been underperforming most of the day here along with some of the other sector. Here is the closing bell on Wall Street.
ADAM SHAPIRO: All right, we have finished with the day. And we're going to be down in the red. The S&P 500 is going to settle down about 5 points. I'm going to see the Dow closed down roughly 22 points. NASDAQ will be off about 10 points. Given that, though, there were still some gainers today within the components of the Dow. The Apple was up about a quarter of a percent. We saw Cisco Systems up more than 1/2%.
One of the big gainers, Coca-Cola Company up over 1% as we get ready to settle. And then we're waiting for some after the bell earnings reports. Microsoft, Starbucks, they are on deck. But let's go back to our guests. As we get ready for the FOMC statement tomorrow, Matt, I wanted to ask you. Is there a potential that Powell could make a mistake the way Bernanke did back in 2013 that could trigger a new-- what do they call it-- a tamper tantrum?
MATTHEW LUZZETTI: Sure, the taper tantrum of 2013. I think it is something that people are thinking about. And when we entered this year in early January, we did hear a flurry of regional Fed presidents talking about the potential of tapering earlier than expected and tapering this year.
We then saw what I think was a pretty concerted messaging effort by the Fed leadership-- Vice Chair Clarida, Governor Brainard, and Chair Powell-- pushing back on that just saying that it is too early to really think about tapering. He has set a cautious tone about the outlook in the near term. I think that he's been vindicated on that given the negative employment report for December, some pickup in jobless claims, and some softening in the consumer spending data.
So at least tomorrow, I should expect Chair Powell to stick to that script to not set off a temper tantrum to make it clear that the Fed is not even thinking about tapering at this point and to reiterate that they're not even thinking about thinking about raising rates, which is far down the road.
SEANA SMITH: Tom, what do you think? Do agree with what Matthew is saying?
TOM GRAFF: Yeah, I do agree. And furthermore, I think, you know, what Bernanke was trying to achieve in 2013 was to ease the market into a normalization period. I think Powell should resist that temptation and accept that there probably will be some volatility when they finally do decide it's time to normalize, but don't preempt that by trying to ease us into it. I think that that could be the message coming out of tomorrow's meeting.
ADAM SHAPIRO: Tom, a lot of people, though, who are waiting for interest rates to truly start rising are losing money if they just sit with cash to the side. A lot of retirees are still getting hurt. Is the pressure to go into equities ever going to give up this year?
TOM GRAFF: Huh, well not if you were strictly measuring versus bonds. While interest rates could be higher this year, I don't think they're going to be higher by a degree that really changes that calculus. So I do think that there's going to be continuous pressure on those looking for income to try to look for it in places other than very high quality bonds, unfortunately.
SEANA SMITH: Matthew, I want to get your thoughts on the housing market, because once again this morning we got another strong report on housing. It's really been a bright spot for the economy. As we look out to the rest of 2021, what are you expecting to see when it comes to housing?
MATTHEW LUZZETTI: Yeah, we expect to continue to see a solid recovery. This recovery so far and the recession itself was so out of the historical norms where you saw very quick reversals in terms of CapEx and housing. They basically normalized normalization in consumer goods spending. And the real laggard has been services spending by consumers simply due to the fact that the pandemic has shut down spending in a lot of those areas.
We think for the most part while you will have a solid housing market for 2021, the recovery will really be dictated by consumer spending. And specifically within that, we're looking at services driving the recovery. So we have a robust growth outlook. We think you get to 6.3% growth this year. We think you get to 4.3% on the unemployment rate, which really is remarkable just given where we were and the fears we had just several months ago. Housing will be a part of that but a relatively small part. And it will be mostly driven by the consumer.
ADAM SHAPIRO: Tom, that projection of 6.3% GDP growth as an investor, what does that mean me? Stocks get more expensive. Do I see bonds, perhaps, still being a loser? The Treasury bond-- what does it mean?
TOM GRAFF: I think if we got to the end of the year and unemployment was 4.3% or in that ballpark, then I think markets-- longer-term bonds would have to start thinking about the time that the Fed hikes. And then the question is going to be, how quickly does that happen? How far do they have to go to control inflation and the like?
Inflation remains in the driver's seat no matter what happens. So I think at that point, you could see Treasury rates moving above 1 and 1/2 and into maybe the high ones if really we were moving that quickly and if there seemed to be continued momentum. I think that if unemployment is still in the fives or so, then we're looking at a couple more years of the Fed at 0. And then interest rates are probably unchanged. For stocks, I think the valuation right now is so high that it's really hard to tell what a GDP print of 6% would do for them. That seems pretty priced in.
SEANA SMITH: All right, Tom Graff, great to have you on the show. Head of Fixed income at Brown Advisory. And also our thanks to Matthew Luzzetti, chief US economist with Deutsche Bank.