Why a 'soft landing is still the base case' : Analyst

As more and more inflation data rolls in, many on Wall Street continue to debate as to when the Federal Reserve will cut interest rates and what the ramifications of their policy decisions will be.

Ross Mayfield, Investment Strategy Analyst at Baird, joins Yahoo Finance to give insight into why he is feeling more bullish on the state of the economy and why he believes a soft landing is likely.

"I think the soft landing is still the base case. I think it's still likely. I mean, inflation is back down to 3%. Core PCE is annualizing over the last 6 months at close to 2%. CPI ex-housing, is 1.5% and we just printed two of the better quarters of economic growth outside of recession recovery in the last couple of decades. I don't know where we declare that the soft landing has happened, but if it hasn't than it's still in the base case that it's going to happen this year for us."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: With this fresh batch of economic data out today, what does it all mean for the Fed's outlook moving forward? For more, let's bring in Ross Mayfield, Baird Investment Strategy Analyst. Ross, it's good to see you. So, yes, you had CPI earlier in the week hot. Then you had retail sales today. How do you put it all together?

ROSS MAYFIELD: Well, the market, as you mentioned, has mostly shrugged off the hotter-than-expected CPI print. A lot of that is driven by housing and our view and I think probably investors' view is you kind of shrug at housing, what are you supposed to do in the near term? Is the Fed going to really shift back to hawkish and rate hikes over just housing?

As far as retail sales, I mean, it's a noisy data print. It's just one month after the consumer has really been such a workhorse for two-plus years at this point. So you don't want to write it off completely, but I do think there's potential for some seasonal issues and some weather-related stuff.

At the same time, the market is going to take any feather in the cap that will make the Fed ease back a little bit and pivot more towards that dovish point of view. So overall, economic data has been good. Every other release this morning on the manufacturing side, on the housing side was above consensus. The Citi economic surprise index is still on the rise and has been for months. So I think overall, the economy looks pretty good. And if retail sales give the Fed just a little bit of pause, and that's probably a good thing for investors as well.

JOSH LIPTON: So-- so Ross, then to your point, if generally speaking, the economic data continues to come in pretty good, whether it's GDP or labor market. Are you then, Ross, still betting on that soft landing for 2024?

ROSS MAYFIELD: I would be, yes. I think the soft landing is still the base case. I think it's still likely. I mean, inflation is back down to 3%. Core PCE is annualizing over the last six months at close to 2%. CPI x housing is 1.5%. And we just printed two of the better quarters of economic growth outside of recession recovery in the last couple of decades.

So you know, I don't know where we declare that the soft landing has happened. But if it hasn't then, it's still in the base case that it's going to happen this year for us. You know, the Federal Reserve might be cutting a few rate cuts out of the picture and pushing them back. But I do think that there's a much higher bar to clear for them to pivot back to rate hikes or a much more restrictive policy stance. They're also talking about what they're going to do about QT over the next couple of months.

So I do think all in all, we're looking at the soft landing. And I don't think the Fed has taken that off the table either.

JULIE HYMAN: And so Ross, what about what we were just discussing a little bit more on the macro front than the macro front in terms of companies forecasts coming in weaker than they have historically and also, some of the commentary we've been getting. Does that give you pause at all?

ROSS MAYFIELD: Maybe the slightest amount. I mean, ultimately, 2023 was about multiple expansion. 2024 needs to be about earnings kind of backfilling those richer valuations. I do agree with what you all were saying. There's kind of an impetus for companies and analysts alike to be a little more cautious than if things turn out better than expected. Yay for everyone involved, right?

There is a lot of uncertainty on the horizon, both in the political and geopolitical sphere. So some of those more global companies that have global end markets and global supply chains might be feeling that pressure a little bit more, especially with the trade environment sure to be a big talking point for the 2024 election cycle.

But overall, it doesn't give me a ton of pause. Earnings are coming in better than expected for Q4 as they typically do. The big bellwethers have mostly reported pretty strong results. So it's something to watch, but not something I'm concerned about yet.