U.S. markets open in 9 hours 27 minutes
  • S&P Futures

    4,441.50
    -33.25 (-0.74%)
     
  • Dow Futures

    34,496.00
    -120.00 (-0.35%)
     
  • Nasdaq Futures

    14,643.75
    -197.25 (-1.33%)
     
  • Russell 2000 Futures

    2,011.40
    -9.80 (-0.48%)
     
  • Crude Oil

    86.29
    -0.61 (-0.70%)
     
  • Gold

    1,842.10
    -0.50 (-0.03%)
     
  • Silver

    24.51
    -0.21 (-0.83%)
     
  • EUR/USD

    1.1328
    +0.0010 (+0.09%)
     
  • 10-Yr Bond

    1.8330
    +0.0060 (+0.33%)
     
  • Vix

    25.59
    +1.74 (+7.30%)
     
  • GBP/USD

    1.3594
    -0.0006 (-0.04%)
     
  • USD/JPY

    113.7810
    -0.3190 (-0.28%)
     
  • BTC-USD

    38,950.48
    -2,972.82 (-7.09%)
     
  • CMC Crypto 200

    920.21
    -75.05 (-7.54%)
     
  • FTSE 100

    7,585.01
    -4.65 (-0.06%)
     
  • Nikkei 225

    27,362.64
    -410.29 (-1.48%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

A rate hike fully priced in by July of next year is ‘way too soon’: Strategist

In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • ^DJI
  • ^TNX
  • XLF
  • ^TYX
  • ^GSPC
  • ^IXIC

Gabriela Santos, J.P. Morgan Asset Management Global Market Strategist, joins Yahoo Finance to discuss rising inflation and outlook on the Fed raising rates.

Video Transcript

ADAM SHAPIRO: We're going to keep talking about what's going on in today's markets, break down the action for you right now with Gabriela Santos. She's JP Morgan Asset Management global market strategist. It's good to have you back. And when we talk about inflation, we kept hearing for the last year temporary, temporary, or transitory. What is your final take? I mean, what's the aftermath of a 6.1% inflation rate?

GABRIELA SANTOS: Yeah, so the day after that hot inflation print, I think we're trying to digest it a little bit more. Where we come to is that we see some elements that will fade over time. Things related to the energy price shock, food price shock, or just the supply demand imbalances, like car prices, they are lasting a bit longer than expected, but they should moderate over the next year. These are things that should work themselves out.

But we also see sticky elements of inflation building. So we see things like rental prices rising at the fastest pace in 15 years. We see wages rising, which we saw with the October jobs report. And we have this inflation psychology taking hold. We're all talking about it. So numbers are important here. We don't expect to keep the six handle or five or even four. We do expect to moderate next year, but to settle on a range of 2%, 2 and 1/2%. That means slightly higher inflation than we had last cycle. And this change matters in terms of asset allocation.

SEANA SMITH: Well, and Gabriela, I think a lot of investors are trying to figure out exactly what this means for the Fed and the Fed's plan to raise rates. There's lots of speculation after that hot print yesterday that maybe the Fed is going to be forced to raise rates sooner than we initially expected. What's your thinking just in terms of the timeline that we should now expect to see?

GABRIELA SANTOS: So we disagree with the thinking and the pricing in the short end of the curve that the Fed is going to react very aggressively to this trend. And what you saw yesterday was a further bringing forward of lift-off and of rate hike expectations for next year as a whole. So now you see a rate hike fully priced in by July of next year. We think that's way too soon. And you even see an over 50% probability of three rate hikes next year-- way too many. We think lift-off doesn't come until December, so we're talking about just one over the span of the next 13 months.

And I think this is still a bit of an unknown, not just because we have a new cycle with new inflation dynamics, but also because the Fed changed their framework last year at a very difficult time, looking in retrospect. So this means that we're trying to understand not just inflation, but also the Fed's reaction to inflation. And we think this is a patient Fed. They're reactive, not proactive. They're very focused on the employment side of the mandate and a more inclusive definition of full employment. So they'd rather be late than too early.

So, to us, that means the short end moved up too much. The curve flattened too much. We should see it come down and the curve steepen. And that's especially good for something like financials, for example, which is one of our preferred stocks, or preferred sectors, when it comes to the equity market.

ADAM SHAPIRO: Two-part question here. It gets to what you just said about the Ted-- the Ted-- the Fed, perhaps being a little bit more patient than some analysts are predicting. But also, it gets to the wage situation that you point out to your clients, which is that most of us have been able to absorb the price increases that companies are passing on. But if wages are not keeping up as fast, growing as the inflation rate, there's going to come pressure, isn't there, on the Fed to do something. And then those companies like McDonald's, which have been able to pass the prices on to us, wouldn't they possibly get hit in the future and wouldn't that affect their bottom line?

GABRIELA SANTOS: Yeah, so in terms of these inflation numbers, we are here talking about 6.2% inflation versus 5% wage growth. Inflation, though, should moderate. We're talking about settling at 2%, 2 and 1/2% over the course of the next 12 months. So we're still talking about real wage gains. And that's extremely supportive certainly of people's livelihoods, but also of consumption, and hence the economy overall. And we do expect a big reacceleration in growth starting this quarter and throughout next year, a 5% average growth, just over the next three quarters. So we would characterize this actually not as stagflation, but as reflation.

And that difference is really important because reflation is actually quite good for earnings growth and quite good for the stock market, especially cyclical sectors. In terms of companies, it's good for companies that are in these sectors and good for companies that are competitive. But they're tricky for certain companies that don't have enough pricing power, that they see their costs go up, but they can't pass it on to the end consumer, and they get squeezed. So we really think it's important to layer our equity exposure with the quality style. Where we can really tease out who are the most competitive companies, those are going to be the ones that will continue to be rewarded.

SEANA SMITH: And Gabriela, beyond some of the consumer discretionary picks maybe that you were just outlining there, beyond the fact that you're seeing some opportunity in financials, like you mentioned earlier, I guess, where else should investors look? Those who have had money on the sidelines right now, they're looking to put money to work. But they're a little bit unnerved just in terms of some of the inflation numbers and some of the other headwinds like supply chain, how that all weighs into that. Where should they be looking? Where's the best opportunity?

GABRIELA SANTOS: Yeah, so for this supply chain point, I know it's difficult to get anything. I'm trying to get my hands on a Christmas tree, and it just keeps getting delayed. And I think the thing we need to realize is we're kind of at the peak worst of these supply chains. They're not going to be fully back to normal until a year from now, probably. But incrementally, we keep hearing from companies that they're slowly starting to get better. And getting better is what matters for the economy, for earnings, and for the market. So this is a much more supportive environment going forward-- reacceleration, reflation.

So, overall, we would be overweight equities versus bonds. We would be especially focused on more cyclical sectors and cyclical regions like a Europe, like a Japan, that have a ton of banks and industrial companies. And we would be underweight and very careful with fixed income, because the place that really sees the danger from these volatile curves and this higher volatility is the bond market. So we would be underweight and within the bond market, underweight duration and underweight government bonds versus high yield bonds.

ADAM SHAPIRO: Gabriela Santos is a global market strategist at JP Morgan Asset Management. Thank you for sharing some of your insight with all of us.