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Markets are focused on ‘Fed and major central bank hawkishness,’ strategist says

HSBC Chief Multi-Asset Strategist Max Kettner joins Yahoo Finance Live to discuss FedEx stock performance, macro headwinds, inflation, recessionary risks, and the expectations for the Fed's upcoming FOMC meeting.

Video Transcript

- Let's broaden this conversation out on what it means for the markets and the economy. Joining us now is HSBC chief multi-asset strategist Max Kettner. Max, great to have you here with us this morning. Of course you were listening in. There's a lot to really break down, and of course how FedEx is impacting and what they're signaling is impacting the broader markets and what's being digested. And I just want to get your headline reaction to what other companies should be taking away from what FedEx had to say about the global picture right now.

MAX KETTNER: Yeah, I mean, perhaps to start with I thought I was gloomy and I was bearish, but listening to you guys for 5 minutes I may need more than one drink tonight if I listen to you guys.

- Make it 3. Make it 3, Max. That FedEx quarter was ugly.

MAX KETTNER: (LAUGHING) So I guess to your question, you could easily argue, oh, this is just one company and this is just-- We shouldn't extrapolate that too far to make sort of macro calls from that. But when we look at the Q2 earnings season, right, that's sort of the third company, the third sort of really bulge bracket retailer/logistics company that is giving us these sorts of news. And to me the big, big problem really is from a global, from a really broader macro perspective like you've asked, four or five months ago, we could have easily made the call, well, it's mostly overstocking, right? It's mostly a problem of inventory overhangs, specifically in the goods, specifically in the manufacturing sector, right? A couple of months ago, we could have said it's a tiny problem in a tiny sector so not really a bit much of a problem.

The big, big issue that we're now facing that's really come up in the last four or five months, and I guess FedEx is one symptom of that, is that it's now spilled over into logistics. It's spilled over into the housing market. It's starting to really spill over into forward-looking consumer confidence data, right, so to the expectations components of consumer confidence data. So, it has become much, much more of a broad based weakness, a picture of much more broad-based weakness going forward. That's the real troublesome news of the last three, four, five months.

- And so FedEx, this update coming at the same time, or the same week at least, where we had seen a CPI print that came in hotter than expected. And so all of that considered, what is kind of that next shoe to drop? B of A doesn't believe that we've hit a bottom yet, so what is that next shoe to drop? Is it a consumer discretionary company that gets out there and updates their guidance and pulls that to the downside?

- Yeah, I think the next shoe to drop is the switch-- Like you said, consumer discretionary-- The next shoe to drop is when we switch from inflation issues and from inflation concerns, peak Fed hawkishness concerns-- will they raise 75 bps, will they raise 100 bps, where's the peak rate and all these sorts of discussions, to when we transition to recession concerns. Because so far what we've talked about so far in the last couple of minutes was purely growth concerns. But clearly what the market is doing right now, whether it's the rates market, whether it's credit markets, whether it's equity markets, is really primarily focusing on the hawkishness on the debate around Fed and major central bank hawkishness on the inflation debate. So that's the primary debate right now.

I think the next shoe to drop is really when people are saying, well actually, we're pretty close now to having to switch from the hawkishness debate to the recession debate. And that is very, very important for markets as well. Because bear in mind if we look at cyclicals versus defensives in equity markets right now, that's actually been holding up pretty well, both in the eurozone and in the US, so there is not an awful lot priced into cyclicals. My guess is that the next shoe to drop really is that we're going to have to start being much, much more aggressively downbeat on cyclicals as the news and as the conviction grows around a recession.

- And then Max, there's also the implications for currencies and notably the US dollar, which you said in your most recent note you guys are still hanging on here-- you and seemingly everyone else, Right it's definitely a crowded trade as I think the Bank of America fund manager survey also showed this week. We've got the pound at its lowest since 1985, so that turn that you described, presumably that turn is also going to affect the US dollar and maybe switch what has been that winning trade this year.

MAX KETTNER: It will affect it. I'm not quite sure it will switch the winning trade, however, because that is the classic function of the dollar. It's the classic dollar smile. At the moment the dollar wins out because cash rates in dollar are looking actually pretty attractive, right? On our measures, for example, in 12 months' time headline CPI should be somewhere around 4% to 4 and 1/2%. Now look at the one-month cash rate in US dollar terms for the next 12 months. So the one-month rate for the next 12 months, that's around 4.1%. So quite frankly putting your money into cash, even in dollars, even for you guys who are based in US dollar terms, that's not an awful trade anymore.

Now for people like me who are based in the UK or the eurozone, that's an even better trade. Because if you think, well look, the UK being faced with a twin deficit. The eurozone for the first time in 30 years being faced with a current account deficit, being forced to finance that. I simply lack really the conviction that you would suddenly switch out of the dollar and buy euros, but sterling or other currencies. For me, it's not really only about, well, I want to short the dollar because I'm more bullish on eurozone growth. Perhaps it's not going to be as awful in terms of growth in the eurozone. Perhaps fiscal support in the UK will really soften the blow. It's not only about the alternatives.

But what I think is underappreciated right now is how much the dollar is actually offering because, bear in mind, again, you're getting 4%. You're getting 4% in a 12-month forward. You're getting paid 4% to hold the dollar in what could potentially be a pretty nasty and pretty ugly recession. So why should I go somewhere else? Why should I go somewhere else, even if there is a big recession coming? But I really don't see an awful lot that can switch this sort of US dollar on around.

- Wow, enthusiastic defense of US dollar and its continued out performance. Thanks, Max. Good to catch up with you this morning. Max Kettner is HSBC chief multi-asset strategist. Thank you.