Watch this one ETF to get a read on the consumer: Strategist
There are a lot of things Federal Reserve members will be watching to figure out their next move on interest rates. S&P Global Ratings Global Chief Economist Paul Gruenwald says the Fed wants to avoid seeing "another burst of inflation where they have to aggressively raise rates again." Marketgauge.com strategist Michele Schneider is watching the "narrative of the strong consumer." Schneider says there is one ETF she is watching in particular to get a read on that.
Video Transcript
PAUL GRUENWALD: What the Fed would prefer to do now is keep the nominal policy rate about where it is. So if we get a gradual decline in inflation, that means real rates, which is the nominal rate minus inflation, that's going to be rising gradually and just sort of slowly squeeze the economy. And that's kind of the recipe for a soft landing. What the Fed doesn't want to do is see another burst of inflation where they have to aggressively raise rates again. That's going to raise the probability of a harder landing.
So if they can stay around where they are now, and then the inflation comes down, and then the real rates come up, I think that's their scenario. And also, let's remember we're still kind of licking our wounds after missing the inflation impulse back in 2021. So, if anything, the Fed and other central banks are probably going to be leaning a bit higher and stronger just to maintain their credibility because the last thing they want to do is kind of have another pickup in inflation. So we think that's broadly the outline of the soft landing scenario.
- And, Michele, do you think that markets are correctly pricing some of these risks in?
MICHELE SCHNEIDER: Well, I think if you look at certain pockets of the market, they're much more concerning. You know, for example, if we just take a look at the narrative of the strong consumer, but we look at the ETF XRT, which I like to look at because it's a basket of both staples and discretionary, it really has been and continues to underperform the benchmarks, the indices, in particular, in the spy.
Is that something like a canary in a coal mine? Possibly. Could it play catch-up? Definitely. But that would really be something that I would keep it strong eye on, would be that whole retail sector going forward. And then I think we'll have a better idea of whether or not the market is really going to be able to sustain these levels or we're in some kind of la la land because, as Paul just said, the Fed is just going to maintain this, and we may have a chance of a soft landing.
And I don't think we can also underestimate the fact that we're going into an election year. I'm not quite sure how that plays into it all, but I would think that the government would do whatever it can to keep us out of a recession because that would not be very good for a potential Democratic re-election.
PAUL GRUENWALD: Yeah, and if I could jump in, I didn't want to leave the impression that the entire economy is doing well. We're seeing a very strong services sector. But, as Michele just alluded to, in parts of the economy, we're seeing some weakness, anything that's kind of interest rate-sensitive. I think commercial real estate would be exhibit number one in that particular narrative.
But she's also right. We're coming into an election year. And, you know, the Fed's an independent central bank. They're independent within the government. But, you know, we can envisage a scenario where there might be some pressure if, you know, things start to soften next year, but that's to be seen.
