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Stagflation is ‘not a credible threat’ right now: Strategist

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Yahoo Finance’s Brian Sozzi, Julie Hyman, and Brian Cheung discuss the state of the economy and outlook with Meera Pandit, JPMorgan Asset Management Global Strategist.

Video Transcript

BRIAN CHEUNG: Let's bring in Meera Pandit, Global Market Strategist at JP Morgan Asset Management, for more on the market action as we start off this week. And Meera, we were having a pretty healthy debate on this program earlier in the show about inflation and the role that it's going to play. It seems like that's going to be the big focal point as earnings season chugs along.

What is your preview for what we should expect inflation to look like? Because we know Fed officials are saying it's going to be transitory, it's going to be transitory, but we have the White House now trying to talk to ports in October now talking about the issues of trying to alleviate some of these price pressures.

MEERA PANDIT: We've seen some cracks to this transitory narrative. And I think that inflation has been persistently elevated for longer than we initially anticipated. Part of that is that the pandemic has lasted longer than we initially anticipated and has really come in fits and starts, which has been really hard for businesses to predict where to go next. And at the same time, the economy has really come roaring back and the consumer is ready to spend. Demand is really high.

But I do think that as these inflation-- as the supply chain issues do subside throughout the course of 2022, we're also going to start to see inflation moderate from these elevated levels. Now it won't be completely transitory, things like housing, things like food. We've seen wages come a little bit higher, so we're going to see higher inflation than we did during the last expansion. But it's going to come down and moderate from these levels.

BRIAN SOZZI: Meera, how fast do you think the US economy is slowing right now?

MEERA PANDIT: You know, even though we feel like it's not slowing, and it certainly has slowed from Second Quarter GDP, we're still well above trend pace growth. You know, if we think about the economy over the last 20 years, it's grown on average of about 2%. We are well above that. And I think that in some ways what we've seen with the resurgence of the pandemic is that it has really elongated the recovery as opposed to destroy a lot of demand.

So I think that it does reduce the risk of overheating, not much of a topic anymore, but it does mean that we are going to start to see that growth peter out a little bit and get closer to trend growth rates by the end of next year. Next year is really going to be the year of normalization.

JULIE HYMAN: And, Meera, it's Julie here. How should we be thinking about inflation and the effect of it on both the US consumer and US companies?

MEERA PANDIT: Well, from a consumer perspective, of course, it is challenging because right now, inflation is outpacing some of those wage increases. And we are seeing that businesses are passing on those price increases to consumers. So I do think it will start to hit the consumer bottom line a little bit more. But the consumer is fundamentally in pretty good shape when we take a look at balance sheets in aggregate, when we take a look at personal savings rates, when we take a look at a number of factors that the consumer is in good shape, but ultimately, businesses are looking to pass on some of those costs.

BRIAN CHEUNG: Meera, people were tossing around these words like stagflation right now. Could you just give us a baseline on whether or not the inflationary output and employment dynamics at play right now do resemble stagflation to you?

MEERA PANDIT: To us, stagflation is not a credible threat at this point because although inflation is very elevated right now, we're starting to see some of those monthly increases moderate a little bit, and we do expect inflation to moderate throughout the next year. Again, growth is still above trend pace. It's still very strong, driven by really strong demand. And although unemployment is still elevated versus what it was pre-pandemic, now at 4.8%, it's come down quite a bit. And there are plenty of job openings out there.

So it's going to take a little while. There's some friction within the labor market to match those who are unemployed with job openings. But a lot of what we saw back in the stagflation-era in the 1970s and the 1980s are just not dynamics that are persistent today.

JULIE HYMAN: And so, Meera, put it all together for us. Should people buy stocks right now? Should we expect that stocks can continue to rally, given all of these sort of crosswinds you're talking about?

MEERA PANDIT: We are an environment where higher inflation is coupled by higher growth. Labor market dynamics are improving. Overall, we are a healing market. We have the backdrop of some pretty accommodative fiscal policy that is still working its way through the economy. And although we do expect the Fed to start normalizing monetary policy, it's precisely because we have such a strong economy.

So at this time, we do still favor risk assets and do still see a lot of opportunity in equities, especially just given how much cash and liquidity there is on the sidelines and valuations being higher in some of the other areas of the market, like fixed income.

BRIAN CHEUNG: And I want to ask about fixed income. Because if you look at the 10-year specifically, it's kind of done a big U the high levels that we saw at least on a yield basis in the spring. What is that telling you about whether or not markets are fully preparing in fully pricing in the Fed's taper? At some point, we know the Fed would like to have that all done up and ready to kind of signal for maybe rate hikes at some point by the middle of next year. But do you think that bond markets could still be at risk of maybe some sort of tantrum?

MEERA PANDIT: I think it's unlikely we're going to see a taper tantrum. We saw yields very stubbornly stuck in the 130s over the summer, but they've started to move higher. And I think some of the different technical factors weighing on yields are slowly being alleviated when we do start to actually see the taper that's going to allow 10-year yields to rise because you're going to have a little bit less demand coming in from the Fed.

We've had a number of issues from the Treasury standpoint where there wasn't as much issuance this year and the debt ceilings, keeping a lid on that, that's also limiting some of the supply. And these dynamics are going to start to shift and that's going to allow yields to grind higher. But we don't expect a sudden spike in yields.

I think that markets understand the Fed's taper timeline, and they've been pretty crystal clear about it from different FOMC members since the middle of the summer. So I think that people do understand the playbook for that. And again, we're underpinned by a very strong economy that warrants tapering at this point.

BRIAN CHEUNG: Yeah, if anything, it seems like people are getting tired of the talk about tapering. But, Meera Pandit, Global Market Strategist at JP Morgan Asset Management, thanks for helping us break that all down on Yahoo Finance this morning.