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Recession in Europe is ‘not going to be insulated,’ strategist says

Medley Global Advisors Managing Director Ben Emons joins Yahoo Finance Live to discuss the U.S. economy, recession risks, labor concerns, market volatility, inflation, money supply, and the outlook for the Fed.

Video Transcript


BRIAN SOZZI: Our next guest says trading the soft landing is hazardous. The stock market isn't giving a thumbs up that a moderate jobs report clears all problems. And added to this, the risk of a full-blown energy crisis in Europe are rising.

Joining us now is Ben Emons, Medley Global Advisors' Managing Director for Global Macro Strategy. Ben, good to see you here this morning. You know, all morning long, we've been talking about an influx of mixed economic data. Is that what investors should be expecting here for the month of September?

BEN EMONS: Yes, indeed. I think that if you see the resilience in the US economy, it's certainly not the case in Europe and the UK, and even in China. So as much as these purchasing manager indices are showing somewhat uplift that may be really from a rebound on inventory rebuilds in the US, whereas in other cases, there's more contraction happening, so very mixed picture leaves you need to believe that a soft landing is really dangerous to trade here.

It's not so guaranteed that you actually will be in one. And if you see the news today out of the UK that they're going to put price controls on energy, that's just putting off inflation in the future and while they're dealing with a major energy crisis. So I think markets are getting nervous here. And you can see from the moves in yields and the moves in currencies there, particularly, that we're entering the fall with a pretty, I'd say, tense moment here as we may be hitting recession in Europe and UK at the same time.

JULIE HYMAN: Hey, Ben. It's Julie here. It's good to see you. Let's connect the dots here, shall we, because we were talking at the top of the show about the European energy crisis and how acute it could be even with this aid now that the UK and other governments are talking about. Talk to us about the ripple effect, potentially, for here in the US and for, perhaps, US companies that have exposure in Europe.

BEN EMONS: Yeah, sure, Julie. And good to see you again too. Yes, one, you can see that actually natural gas prices, they have been rising pretty fast here. You know, and that is input to companies for any type of production. Secondly, it's also about expectations. If we are entering into a major recession into Europe, it's going to impact the US economy as well. It's just not going to be insulated.

Lastly, it's about the measures taken. So the Bank of England and the ECB have to catch up to the Federal Reserve. And as they push up rates faster, it pushes up their local bond yields, and that's reflected today into Treasury yields, for example. On top of it that you had a stronger than expected ISM Services. So I connect all these dots, yeah, we're looking at an environment of rising yields and then falling stock prices on a really mixed or negative economic picture.

BRIAN SOZZI: Ben, do you think what's happening in the eurozone right now blows back onto the US to such an extent that it puts us in a recession?

BEN EMONS: That's maybe a bit difficult to determine at this moment. And the real reason is just that the US consumer obviously has been quite resilient, as everyone has concluded, and may not be so directly affected by Europe exactly that way. But on the other hand, companies and export and trade will be. And ultimately, that's what could bear fruit on-- well, bear fruit-- be negative on employment here.

So I think that's probably the real connection is Europe gets into recession. We do get changes in employment picture here. And that will lead them to confidence issues and spending curtailing. So yes, there is a risk here. I don't think that the US economy right now is in recession, but it could be on the heels of us-- Europe enters a recession. So clearly, a link there.

JULIE HYMAN: So Ben, you said at the beginning of this conversation that it was dangerous to trade the idea of a soft landing, assuming there would be a soft landing. So what assumptions did you make? And how should folks be navigating this market?

BEN EMONS: Yeah, one, we know that, quote unquote, "soft landings" have been really rare. I mean, the last one was in the '90s, and that was actually because of a productivity boom that started in the US in technology coming to fore, I think helped the US economy avert a potential and a worse outcome from coming out of the '91 recession. We just don't have those circumstances today.

Secondly, and this is, I think, part of the pivot misunderstanding that happened in July, people assumed there's going to be a soft landing and the Fed will pivot. And we now learn out of Jackson Hole that that's not going to be the case. So that makes it dangerous too. Policy must tighten further in order to make sure they can control inflation.

And on the latter, inflation is highly uncertain. Yes, it's softening and commodity markets have changed. But the outlook for inflation is so unclear given the nature of the energy crisis in Europe that doesn't let us be unaffected. Yet it all makes it, to me, really hazardous in order to trade a soft landing by being overweight stocks.

BRIAN SOZZI: Yeah, we're seeing maybe some of those concerns being priced in in real time, Ben. Dow now down over 200 points, those losses accelerating to kick off this holiday shortened week. But to your point on the Fed, how much further do you think the Fed will go with respect to interest rates?

BEN EMONS: Well, it seems to be indicated now by several Fed members, and it looks to be the real message, is that the funds rate not only has to hit 4%, but maybe has to go above 4% to be absolutely certain that they can get inflation on a trajectory downwards by next year. This is, by far, not guaranteed, even though there are projections out there by the Fed and the private economists that it will, the funds rate really has to go higher than what we've experienced in years.

If you add on quantitative tightening, which is now really getting full-blown this month, it would actually add incrementally about five basis points a month or so in tightening. It actually, if you calculate it that way, it could lead you even to a higher funds rate by next year, something like 4 and 1/2% to 5%. So the Fed is really on track to try to fill its mission on price stability. It doesn't lead into a pivot and pause or even cutting of rates. It leads us to a higher funds rate, likely above 4%.

BRIAN SOZZI: Ben Emons, Medley Global Advisors' Managing Director for Global Macro Strategy. Good to see you. We'll talk to you soon.