Fed rate cut expectations, plus why commodities may be in a bullish supercycle

[Music] welcome to stocks in Translation our essential conversation cutting through the market Mayhem the noisy numbers and hyperbole to give you the information you need for your portfolio now today I'm going to be joined by Jordan Jackson he is a JP Morgan asset manager Global Market strategist along with the people's producer cydney free give us some people's thumbs up there Sydney thank you all right on the docket today we're going to be talking about the FED we've got a meeting this week no Cuts or raises are expected but lots to dig into also our word of the day super cycle are we in a new bullish commodity super cycle we got cocoa gold at records while oil seems to have settled down what geopolitics means for the future of fabric of our manufacturing base and also this episode is brought to you by the number 212,000 that is the number of weekly Jess claims that Wall Street expects this Thursday which may be more important than the monthly job numbers we get from Friday and we're going to tell you why so Jordan Sid thank you for joining me here we want to take the top story of the week Jerome Powell and Company gathering around the Federal Open Market Committee table I'm assuming it's a big table now Tuesday and Wednesday Wednesday is a big decision day we're not expecting any big changes but there's a lot at stake here and handicapping ads for or excuse me odds for the Fed rate cut those have drastically changed from the beginning of the year from six to one or two now what do you think well I I think the fed won't be able to cut interest rates uh certainly not this week and perhaps not at all this year um and you've talked about sort of the roundabout that we've made over the course of this year we came into the year expecting well at least markets were expecting six to seven of rate Cuts this year uh our base case was for three uh on JP Morgan aset Management we expected June September December and now that seems like even a a high bar to achieve so uh when you look at the underlying Dynamics remember the fed's got two mandates tight labor markets and price stability you've got check mark on tight labor markets okay uh through the through March of this year that marks the 28th consecutive month in which the unemployment rate has been below 4% this is a very very tight labor market you mentioned jobless claims jobless claims have continued to run at very very low Lev level suggesting that if you want a job you can get a job demand is is pretty strong out there for for labor now on the inflation side the inflation side becomes a lot more challenging for the FED we're seeing signs that inflation is remaining very very sticky uh if you look at and I tend to want to look at the annualized Run rates that gives you a better sense of inflation momentum right near-term inflation momentum sometimes the year-over-year numbers you fall prey to B to base effects that kind of muddles the picture a little bit but if you look at headline CPI on a three-month annualized basis that's at 4.6% uh if you look at the FED super core measure which they're calling core Services ex Shelter touted by uh the FED in a big way and pow last year don't hear as much about it anymore give us the number maybe this is why sure uh cuz the three-month annualized run rate on that figure is at 88.2% there's just no way the the fed's got uh downward or disinflationary uh inflation momentum in order to be able to cut rates yeah I I'm really glad you brought up super cor because this was a word we were hearing um a year ago when the Fed was touting the fact that inflation was coming down quite rapidly and um I think there when we talk about inflation it's easy just to kind of cast a broad net but where there are all kinds of different components you got the input side and then you also have wage inflation but on the prices side we have the goods sector and the services sector and you're you study the economy you write about GDP for JP Morgan tell us what that means uh for investors no absolutely so so core Goods that tends to be a healthy basket of Commodities so to speak right and that tends to be driven a little bit more by supply side Dynamics you think about um uh the Panama Canal SW Canal a lot of goods flow through these important parts of the world and also Middle East there's a lot of geopolitical risk uh happening in the Middle East so that could also complicate a lot of these Supply chains and thereby impact core Goods prices we haven't seen that happen just yet core Goods have actually been outright deflating or prices falling uh for the better part of of the last 12 12 to 16 months or so um now the core Services one of the reasons why the FED has sort of focused on core Services because they believe that that is the uh sort of inflationary metric that is more sensitive to uh monetary policy the demand side uh and particularly wage inflation tending to to to drive a lot of what we see uh in course Services inflation so uh they think that fee through of higher wage inflation will feed through to higher core higher core Services inflation and and monetary policy is actually somewhat useful uh in quelling uh uh sort of price pressures more so on the services side but the challenge is they're not they're not getting those those leing price pressures on the services side no no there as you point out uh rather depthly here the three Monon uh the three Monon numbers are running up at a rapid rate even the year-over-year now at least have stagnated they're just not coming down you mentioned geopolitics so I want to talk about that arguably we are in an era now it seems almost a secular thing you wonder how this is is it going to be extrapolated throughout the end of the decade but geopol geopolitical unrest seems to be on the rise and that usually means inflation um talk to about that yeah and that's kind of the RIS where where markets are a little bit worried about stag flation uh it's it's it's a hard economic environment to sort of Imagine uh but it's more difficult for policy makers to adjust policy around stagflation because uh typically where one giveth one taketh away uh so what do you need for stack inflation this was the 1970s basically EXA exactly which I barely lived through I remember gas lines but that's about it uh I wasn't even a thought back then um wait let's let's pause for our viewers and Define what stag flation is yep so so stagflation there's three components to stagflation first it's weak growth second it's high inflation third it's high unemployment um and it's a very challenging because I mentioned as one giveth one taketh away typically the economic tax B will tell you if you have low levels of of unemployment that should generate more inflation right because as companies have to lobby for that additional worker in a low unemployment rate environment they potentially have to pay up to attract that worker so you have to you get you get wage inflation that ties itself into higher higher overall inflation and the inverse being true uh uh as well um so we're but when we break down those three components we don't think we're in a weak growth environment I know the GDP Point print for the first quarter was a bit of a a weak number it's positive to me I mean after all the recession calls it's 1.6% that's not nothing right relative to expectations of 2 and a half% but when you look underneath the hood the big detractors for growth in the first quarter were inventories and trade those are two very very volatile components of GDP growth but when you actually strip those out and look at look at real final sales to private domestic purchasers the economy grew at over 3% uh in the first quarter so this is not a weak growth economy as I mentioned the unemployment rate has spent um a long time under four 4% and inflation while it's certainly seeing signs of being sticky and I hesit hesitate to say re accelerating but certainly seeing showing signs of of a lot of stickiness um that's still running at 3 to 4% not 9% like where we're at in the middle of 2022 uh so this is not a stagflationary environment U but this is an environment where the FED probably can't cut rates anytime soon I want to stick with central banks here and get to Japan real quickly and then we'll move on to Commodities but uh some interesting developments with Japan this week the the US dollar versus the Yen reached 160 that means the US dollar was strengthening the Yen was weakening yen is at the weakest point it's been since 1990 and there's lots of talk about what that means for investors it was a holiday in Japan so take that with a grain of salt but it looks like authorities there are reacting to these moves in the currency Market meanwhile their rates are at 0.1% they were negative a few months ago at the beginning of the year now they're 0.1% and uh the US is at over five uh Europe is over four that's a big gap there so should investors in the US be at all concerned about what's happening in Japan uh I I think they should be uh now when I think about curring I always try to mind myself uh there's two sides to every coin no pun intended um but generally speaking uh when you think about why the Yen has weakened so much not only has it been uh the bank of Japan being willing to stick to very loose monetary policy yes they got interest rates out of out of negative territory uh but they're just right above zero where everyone else generally speaking across developed markets uh have four to 5% uh policy rates also the FED on the other side of the coin has had to shift more hawkish because the data has has been uh a lot stronger than what ourselves and policy makers had anticipated so this gap between hawkish fed more doish Bank of Japan has led to some significant weakness uh in the end now from an Investor's standpoint you know one of the challenges historically uh the Japan IND indices tend to be heavily skewed towards multinationals so these large companies like Sony Mitsubishi that make everything exactly but and they generate a lot of their revenues overseas so a weaker Yen tends to be good for these companies um now that negative correlation has come down a bit uh really since the course of the pandemic but I do think that this is sort of uh any sort of strengthening in the yend uh could could provide a bit of a a bit of a headwind to to to to their Equity markets um also the bank of Japan while they gra very gradually are going to to to raise interest rates um they're still committing to um uh uh you know some degree of yield curve control they're saying that they're not committed to yield curve control but they're still in the market buying uh jgbs to help to to to stabilize the market so I think um there's there's still some concern uh around around Japan I I recognize the investment Community maybe tactically a bit more overweight but I'm not seeing any sort of structural changes in terms of the demographics out of Japan for me to get super excited uh about that market over a longer term Sid you're looking super excited here let me ask let me ask you something what's the Rel we're talking about the bank of Japan what's the relationships between all the central banks do they try to coordinate their move like they're all wanting to cut right now obviously not all of us are there yet uh but a couple years ago they were all raising what's kind of the relationship between all of them so you know they monitor what other central banks are doing and a lot of times that the challenges tends to be within the currency Market higher interest rates tend to uh support currencies lower interest rates tend to tend to do the opposite and you have scenarios like now where Global central banks developed markets in particular have tighten rates very aggressively uh and the bank of Japan has has has tried to stay very accommodative and that's put a significant amount of downward pressure on the end and that has a myriad of of implications uh not just for companies but for uh you know domestic consumer confidence as well because that tends to import some unwanted inflation on domestic consumers uh so they try to to maintain that Independence and adjust policy rates based off of their own domestic conditions by way of Labor markets and inflation um but but obviously um they do care about uh what what other central banks are up to they also all meet about six times a year in basil Switzerland and uh this has been written about um and so there is a degree of coordination I would say it's not always the case though the global financial crisis 2008 a lot of uh people I hear who are from Europe say that Bernan went rogue um difficult to difficult to kind of parse out what went on behind closed doors but at the end of the day they have every every company has every country excuse me has their mandate and they have to serve their populations first at least in theory all right we we have to uh take a little bit of a break here so for our viewers on the streaming platforms we're going to take a quick break in the following moment for everybody else let's carry on with the show all right well we were going to talk about Commodities and I think that's time to raise our new word of the day it is super cycle now we may or may not be in a commodity super cycle we're going to talk about that in a second Jordan but I just want to talk about Commodities real broadly here we've seen an explosion in the price of cocoa coffee gold silver some of these Commodities are well off their Highs but uh we do have a lot of action and then WTI Crude oil one of the more famous Commodities that's really not doing a whole lot it's at $82 a barrel so Jordan do you think we're in a new commodity super cycle or is this just a bit of strength we're seeing and I guess how does that play like how long would you expect that sure uh so I don't think we're in a commodity super cycle but I do think we're in this environment that'll play out I'd say over the next 5 to S years in which a broad basket of Commodities uh could be could be well supported now keep in mind this is over roughly the last 30 years when you look at core Goods inflation and in the broad basket Commodities has actually been been coming down and prices actually actually falling for for the most part um but there's a couple of reasons why I think um Commodities certainly deserve a share of client portfolios uh one when you think about the uh renewable energy transition that you know it's probably uh maybe in its second or third inning in Europe certainly in its first inning uh here here in the US uh in order for us to uh digitize or Electrify the Grid in order for us to build up a lot of these solar and wind and wind farms etc etc uh you need the lithium you need the nickel you need the Cobalt uh in order to be able to do all that and so in order to achieve the the end goal of a sort of a renewable uh grid you're going to need a lot of these these inputs um and I think that's going to create a a source of demand uh we should also recognize that China has dealt with a myriad of challenges over the better part of the last uh call it year or two um and any sort of Revival in the Chinese economy where there be domestic consumers coming back online um or or them you sort of whipping off the old Playbook uh and and building out a lot of infrastructure um that's going to also generate a lot of commodity demand as well and we also have to remember globally um that Global growth uh certainly had sort of struggled a little bit and and continue to kind of struggle a bit over the last couple of quarters but could certainly start to rebound and that stronger global growth will also increase commodity demand as well and so I think on balance you can certainly paint yourself a picture in which uh again we may not be headed for a super cycle but I think commodity prices could could be well supported and commodities have a place in your portfolio you're saying so you know a lot of people follow the 6040 uh stocks and bonds what percentage or how much should you allocate to Commodities sure I'd say something like 3 to 5% um so not a huge huge huge waiting um but uh I think that's an appropriate sort of uh uh Point real quick how much do crypto crypto uh for those investors that have the risk tolerance that have the longer time Horizon I think equally a 3 to 5% allocation uh not just in Bitcoin but in a in over a diversified uh uh uh basket of cryptocurrencies 5% Commodities five up to 5% uh crypto as well give you 10% exposure in some of these alternative Investments uh I come from the Commodities field and so I I looked historically at correlation in the market and the 6040 portfolio is indeed pretty well Diversified at least more Diversified with some Commodities exposure all right we got to move on we talked about the labor market this brings us to our number of the day from the BLS and it is 212,000 that's the expectation for weekly jobless claims this Thursday and as we've been talking about we're also getting the monthly numbers on Friday but the weekly mon number might be a little bit more important at least as a leading indicator this is something you've written about tell us about it sure uh so we tend to like to look at the initial jobless claims number as you've highlighted uh Jared it tends to be a good forward-looking indicator of of job creation um right now those numbers uh have continued to run at very very low levels uh and this is just again just a reflection of demand for labor continue to be pretty uh pretty robust uh we do anticipate the employment report that we get uh this upcoming Friday uh is going to to to show continued job strength we think the unemployment rate is going to print 3.8% uh and we think we're actually going to add about 225 to 250,000 payroll gain with 200 plus thous another really really strong strong report and and you know I I think a lot of attention gets focused on the government side yes government has been hiring a lot lately but we've also seen a bit of an uptick in hiring across construction and continue hiring in in the health care sector as well so there is a little bit more kind of breath in terms of of the hiring it hasn't just been you know those folks that who who couldn't get the private sector job earlier on in the expansion are now have to opting for a government real quick I'll say that construction jobs and manufacturing jobs tend to be leading indicators they dip first and they have just remained remarkably strong over the last few years really not a lot of cracks but as you said the weekly numbers I love that granularity you get it every week and that is a leading indicator of when we start to see problems in the job market that we're admittedly not seeing right now um all right I do want to uh keep it here with the labor market Sid any questions about the BLS and all these reports that we're talking about yeah well I I definitely learned something new about initial jobless claims there because I feel like we we don't ignore it but it's just every week when something's every week I don't know you tend to not focus on it as much as the monthly jobs report I sort of feel like uh but when we're talking about the monthly jobs report I'm a little confused I keep hearing there's discrepancies in terms of what goes into this report in the BLS there are two different places uh those numbers come from the surveys yeah the surveys different surveys what's that situation I feel like that's not something everybody knows yeah so so there's the establishment survey that's where we get the non-farm payroll number from and then there's the household survey which is where the actual unemployment rate is derived from so businesses and households basically exactly exactly and so we have seen generally weaker numbers coming out of the household survey uh relative to The Establishment survey um and so the establishment is is generally assumed to be um there's a lot of seasonal adjustments uh that happen uh not just on the household but also uh on the establishment survey and so when you look at say the beginning of the year for an example which is right seasonally uh you hire a lot of folks part-time workers uh in the fourth quarter November Thanksgiving Christmas um and then you lay off a lot of workers but there's seasonal adjustments that are applied on top of that that tries to smooth out that ride and so you tend to get perhaps stronger numbers coming out of the establishment survey versus what would be signaled coming out of uh the household survey i' also just just really quickly just adding there's some wonky things happening in terms of how part-time work is sort of calculated across both of both of those and I think that could be muddling some of the numbers also I would add that since the pandemic survey numbers survey response rates in general for all kinds of economic surveys have been depressed so we're not getting as accurate results as we used to get and so the revisions also tend to be a lot bigger and then the BLS does a once per year accounting I think it's in January February and that's when we see the two reports catch up and I think in the last reading the two reports were more or less in agreement so some of those arguments Got Away uh but nevertheless it's something that seems to pop up most uh imployment situation reports let me ask if with all this seasonally adjusted data why don't why don't you just not report it every month or whatever and wait till the DAT is corre I don't know don't you think it's interesting though that something could shift that much like you're I don't get it well the thing is I think people have to make decisions based on what we know and they'd rather do that based on flawed information then no information so yeah we could get perfect information once per decade we this is the rate that we had in 1990 we're sure of that it's not going to help me you know it's not going to make me decide to buy Bitcoin although it might I give in all right um we talked about a number of economic reports we got a couple minutes left here uh does look like it is time for another episode of who wore it better now this is our take on Hollywood and today's topic is AI we have just seen an explosion in AI interest the last year and a half and when people say AI we generally take them to main Tech but the AI trade is not just track Tech it's also about infrastructure it's about the Min mining the materials necessary to make those chips assembling the servers supplying them with electricity investors might be surprised to learn that both large cap utilities and Industrial so two sectors utilities and Industrials those are outperforming the tech SE sector this year by a large margin um I should also note that communication Services is a different entity that houses alphabet and meta for various reasons uh both of those uh are in the second best sector so kind of a jumble here but I guess my big question to you is which sector is wearing this AI Boom the best is it actually Tech is it utilities is it Industrials what do you think uh I think we're seeing it implemented today across a number of those different sectors but uh I actually we we'll slightly adjust the question say who will be using uh AI the best and to my response to that I'd actually say Healthcare um so I had I had a very very interesting conversation with uh a former CFO um he's a pathologist um and he's he's uh he's starting his own company but he's embracing AI in a way in which he's bringing Imaging AI Imaging um and being able to analyze uh benign cells uh but be able to established with this this this Imaging uh which is absolutely incredible uh probabilities around if these cells can become cancerous um and so you think about that sort of implementation um and how impactful that could be for for healthc care more broadly and I can't imagine all these other areas uh in which it could be uh really really impactful and I think it's just going to be revolutionary for for the healthcare industry uh going forward it wouldn't be surprised next 15 years we'll see AI robotics doing hip and knee Replacements yeah you're you're our first guest to go Rogue in the segment and I love it an answer that we did not expect Healthcare as the beneficiary the biggest beneficiary of AI Sid you got a quick question yeah yeah well so disregarding just AI like what there are so many sectors that seem to deal with tech like what like two of the mag seven stocks are consumer discretionary yeah Tesla Amazon two are our consumer services right uh communication Services sorry so why is that the case why is everything split into like these different sectors when it's all just like where it's it's actual apples to oranges why is it apples to oranges I guess so yeah um I guess it's it's it's sort of how the how these businesses run to some extent right you think about you know technology it's it's typically been driven as a is a high growth sector it's assumed to be a sector which companies uh are you know are almost called by the investors to be putting Capital to work but I find it even interesting that even those are starting to change that the fact that two of the top or of the max 7 companies are issuing dividends now we would have never imagined seeing these these large growth companies issuing dividends uh you know 20 years ago uh since many of the the the the top performing tech companies back then were not even profitable we got I got to stop you there cuz we're winding things down conversation for another day will be continued uh that's all for now keep it tuned to Yahoo finance thank you [Music] sh

Channel: Yahoo Finance

Views: 2,771

Keywords: Yahoo Finance, Personal Finance, Money, Investing, Business, Savings, Investment, Stocks, Bonds, FX, Currencies, NYSE, Equities, News, Politics, Market, Markets, Yahoo FInance Premium, Stock market

Id: I1XLa8uHYdA

Length: 24min 0sec (1440 seconds)

Published: Tue Apr 30 2024