Fed’s comments on inflation, rate hike outlook aren’t ‘new information’: Strategist

[00:00:00] Speaker 1: All right, here we are on the final hour of trading. You're looking at gains across the board. This movement coming ahead of tomorrow's inflation data. For more on the recent action that we've seen, we want to bring in Jack Manley, JP Morgan, Asset Management Global Strategist. Jack, it's good to see you. So we're looking at gains today. As markets have performed since the start of the year, it's been pretty strong. The NASDAQ leading the way, the S&P up just around 7.5%. From your perspective, the gains that we've seen so far, anything more than just a short covering rally? [00:00:29] Jack Manley: I think that there's a lot of hope right now that the trend that we start to see emerge and inflation continues. And that's why, at least partially, you know, maybe some folks home right now with the nurse in a hangover. But I do think, you know, that given that we have that CPI data coming out tomorrow, it is just hope for yet another instance of evidence that inflation has turned over. And of course, the implication of that would be perhaps a change in Fed policy. And at the end of the day, rates have been the only thing that's mattered to markets for the last 13 months. So I see why it's happening. I see that the trend is very encouraging. I don't know if I'd necessarily believe in the legs of it short term, but long term, certainly, we are closer to the end of this hiking cycle than the beginning. And that's something to be encouraging about. [00:01:09] Speaker 3: And, Jack, what if that number comes in hot tomorrow? What are the implications? [00:01:13] Jack Manley: It depends why it comes in hot. That's going to be the big question. You know, there are certain things that we can account for in the CPI print that may move higher and that we can just sort of brush aside. You know, we know that energy prices may be moving higher in that print. That's not going to really move the needle too much, especially since headline figures are typically discounted. We know that shelter has been a little bit funky right now. And so reading too much into those numbers may be a little bit dangerous. The one that I do think we need to pay close attention to in terms of perhaps an upside surprise is what's going on with services, because that is where inflation has shifted. It's gone from supply over to demand. And if service inflation heats up a lot harder than we would have thought, that's a little bit more durable. That's a little stickier. [00:01:52] Speaker 1: What do you expect to see from services tomorrow? [00:01:54] Jack Manley: I think we continue to see at least a flat, maybe a little bit of a moderation. You know, the nice thing or not so nice thing about CPI is that the lion's share is driven by shelter. And so you can see modest upside or downside surprises and a lot of other factors that won't necessarily spill over into a big blowout, you know, a high print or a significantly lower print. That's kind of the nice thing, I'd say. But the wage growth story, look, is a little bit frightening. It has held up a lot longer than we would have thought. Labor force structurally smaller than it had been in the past. That's going to feed through into services. It's going to take a while for inflation to get back down to something that we're more comfortable with. [00:02:29] Speaker 3: What's a while? And what's something we're more comfortable with? Are we talking about 3.5% a year from now? And does the Fed just accept a different target? [00:02:39] Jack Manley: So the funny thing about the Fed targeting, I think, is that, you know, we've been talking about a 2% Fed target on inflation for almost 20 years. And if the Fed was willing to persistently allow for an undershoot of that target, there's no reason to believe that they would not allow for us to persistently overshoot that target. I mean, very rarely have we actually come right in line with that 2% figure. So tolerating something above that without the Fed explicitly acknowledging a change to the target, I think, is entirely possible. When it comes to the outlook for inflation, what should we be looking for? I do think 3%, 4% feels a whole lot more reasonable and certainly a lot better than where we are right now. How quick that happens, I do think, has to do with shelter in particular. And, you know, we've been looking at some numbers on our end. If you look at what's going on with rent, which ultimately is what feeds through into services inflation, we start to see a very real moderating in those figures. And, in fact, there are some major cities, New York City included, that have actually seen outright rent deflation over the last several months. It's going to take a little while for that to feed through, but halfway through this year, we may start to see some material downward pressure on inflation just based on shelter. [00:03:42] Speaker 1: Yeah, and Jack, CPI is so important here to the markets because of the implications of what it means for a Fed policy. We've really seen any time a Fed official speaks, the market really typically tends to move and a lot of times hears what it wants to hear. Is the market putting too much, too invested with what the Fed officials are saying? And then instead, what should they be focused on? [00:04:01] Jack Manley: Yeah, you know, I got to control myself a little bit right now because I get a little heated when I talk about Fed policy. It's a real challenge. And I get it because, you know, like we said earlier, rates are what matters right now for markets. And it's been the thing that matters for the last 13 months. So understanding Fed policy, look, that's critical. But when you hear some of the comments that are coming out of the Federal Reserve, like what we saw last week out of Powell, out of Waller, we have to acknowledge that all they're doing is stirring the pot. No new information gleaned from any of that commentary. You know, we hear that, oh, well, maybe rates have to move higher from where they are right now. I could have told you that. The dot plot has looked like that since December. You know, oh, well, maybe rates are going to be higher and longer than what some people expect. Well, you know what, I bet we could pull a group of individuals and find at least one that thinks that rates are going to get cut by the end of this year. You know, so like not a lot of clarity, no new information. What I'd rather pay attention to is the underlying macro data, like the employment report, which is actually a lot more complex than the number that we saw, like tomorrow's inflation print and what that may mean. That, I think, is going to help to steer a much clearer view on Fed policy. I would not hang off of every word out of every Fed governor. I think you'd go crazy. [00:05:09] Speaker 1: We are going crazy. We've already started going crazy. [00:05:13] Speaker 3: He's the guy who says, I get heated when I talk about the Fed, said Jack Manley. Good to see you, sir. Thanks for being in the studio. Thank you.