Gary Siegel (
Hi, and welcome to another Buyer Leaders event. I'm your host Bond Buyer Managing Editor Gary Siegel. Today we're going to discuss yesterday's Federal Open Market Committee meeting with my guest Edward Moya, senior market analyst for the Americas at Oanda. Ed, welcome and thank you for joining us.
Edward Moya (
Oh, pleasure is all mine. Thanks for having me Gary.
Gary Siegel (
So was there anything in the post FOMC meeting press statement or Chair Powell's press conference that surprised you or grabbed your attention?
Edward Moya (
I think for the most part the statement went as expected. I was surprised though during the press conference when Fed Chair Powell didn't really seem concerned about loosening the financial conditions and I thought that Fed Chair Powell, while he suggested that there could be more rate hikes he wasn't rather convincing. He was rather dovish. And I think that this is something that he might regret. I think the Fed has been late to the game in addressing these inflationary pressures. They were wrong about transitory. They started this rate hiking cycle too small and I feel that there's a growing chance of a policy mistake and I think the markets they're pretty confident that the end of tightening is here, whether it's one and done or they follow through on that dot plot forecast from December and deliver a half point of total rate hikes over the next two meetings.
(
I think the markets are moving forward and they're seeing rate cuts and they're seeing a couple before the end of the year. And that's something I thought you would've seen a much more intense pushback from the Fed. And I think that's something that as we hear from Fed speakers going forward, I think we might get a little bit more of a fight back here because I think there's still a lot more fighting that needs to be done for inflation. Yes, the disinflation process has started as Powell highlighted, but it's still twice above target and I think there's still a lot of inflation risks on the table that they can't be complacent here. So I think the markets they obviously had their reaction but I think there's still more work that needs to be done. And I think Fed Chair Powell could have gotten more out of bringing rates to restrictive territory with better languaging. And this might prove to be troubling months down the road if inflation gets stuck at 4% or maybe three and a half.
Gary Siegel (
It's funny because in the past Powell seemed to be more hawkish at his press conference than the FOMC statements. Did you notice that too?
Edward Moya (
Very much. Yes. And I think what was very interesting was once he said the disinflation process has begun, I think for a lot of people they were, that was it, that's all they needed to hear. Inflation's going to continue to come down. And with that I think there's still a large part of Wall Street that's expecting a recession to hit this economy and that's why you have a strong case here for rate cuts. I think we have to remind ourselves that the Fed has clearly signaled that they know that this rate hiking cycle is going to lead to economic pain. And I think that the Fed's going to get tested here. I think we're going to see exactly how long they can remain with keeping rates at these elevated levels over the next few months. I think there's also a tremendous amount of inflation risks still on the table.
(
So I think we've seen energy prices come down pretty significantly over the past couple months, but that could easily get undone. And I think there's still a lot of question marks as far as where will inflation be by the end of summer. And I think the Fed is, the Fed's job is nowhere near done and I think Fed Chair Powell's press conference had a dovish tone and I think that's one of the reasons why we're seeing risky assets react so joyfully. And I mean with the NASDAQ now flirting with bull market territory I think that's a big head scratcher. I think at the beginning of the year we were expecting a big defensive trade to start the year off and now it seems that we're already off to the races and it's only the first week of February.
Gary Siegel (
Well, Powell did say in the press conference that there's still a long way to go and that levels aren't restrictive yet. The Fed has been pushing the higher longer narrative and the market still isn't buying it
Edward Moya (
It's not, I think one of the reasons why is because when Chair Powell was asked the question about financial conditions, October was I think the big changing point for markets. We were starting to see financial conditions were tightening, they were steadily tightening. If you throw up the chart, you could see that it was trending higher then all of a sudden in October, conditions started to loosen. And now when he was asked, does that concern you? He said, no, he, he's not pushing back there. And I think that was pretty much telling markets that he's not going to get in the way of the markets pricing in rate cuts. I think it shows you that Powell is very confident that these disinflation trends are going to remain. And I think obviously we have an overreaction to that, but that's I think why you're going to see it's going to take take a lot of convincing a lot of pushback that they're going to still remain aggressive or still delivering these ongoing rate increases.
(
And I think everyone's really questioning at what point will they break and pivot. And it seems that half point is getting priced in before the end of the year and just three weeks ago,I think most people would've said they probably would keep it on hold for the whole year, maybe debate a 25 basis point cut in December and now it just seems that everyone's expecting the Fed to ultimately return to its true dovish shelf later in the third or fourth quarter. And I think that is going to make it harder for inflation to continue to come down. So I think it that's going to take away getting policy to restrictive territory and I think it's probably a communication mistake here by the Fed chair.
Gary Siegel (
Well it's interesting that you say it's a communication mistake because all along he's been communicating and people have been interpreting what he says a different way. People see what they want to see in his speeches and his press conferences.
Edward Moya (
Very much and his dot plots. So I think that the true test will come in March when we get the updated dot plot. And I think that that's a big question. Well, how many members will agree with one and done? I think the disinflation trends, they're likely to remain in place. We still have two inflation reports, we still have two more employment reports where you'll see most likely a slowing a weakening labor market, but wage pressures seem like they're still going to be remaining in place. I mean the JOLTs data, yes, it was December, but still 11 million job openings. I mean this labor market is still when you take a look at the service sector, it's still I think going to be fairly supported and I don't think you're going to have really much significant weakness in wage pressures and that's ultimately and approved to be inflationary.
(
I think that people are going to be able to spend more, buy more. This growth in the first quarter is going to be minimal, but I think we're still going to have growth and that's something that I think will complicate keeping these disinflation trends going. I think people got excited when we saw how inflation that came in a lot lower than expected and it happened again I am becoming a little bit doubtful that you're going to see that become a recurring theme and if that happens, it'll be interesting to see how the market reacts. Does a lot of the move into risky assets get undone? Does that change the decline we've seen in global bond yields? And I think there's, there's still a lot that can impact inflation. Yes, we're going to be trending lower, but I I'm concerned that it's not going to be as quickly as people are expecting.
Gary Siegel (
Inflation is still an issue and Powell has said that his job is to fight inflation. With the market expecting a pivot, isn't that completely based on the fact that the market believes there will be a recession this year or would there be a pivot even if there wasn't a recession?
Edward Moya (
I think it's mainly because that there's an expected recession. If we somehow had a soft landing or if we were able to squeak by avoiding a technical recession I think that would suggest you would still probably have the economy doing too well to keep disinflation trends remaining in place. And I think that would support the argument for higher for longer. So we've seen the ISM services report go into contraction territory, finally. Manufacturing activity is in a recession. You have the housing market is in a recession finance too. We've seen countless layoffs announced on Wall Street. These are the parts of the economy that are weakening the service sector. That's the key. Will a lot of these leisure and hospitality jobs remain strong during the summer? Probably. Will we still see a lot of pent up demand and travel? I think so and I think that that's only a small portion of the economy but I think there's still expectations that you're going to have,
(
I think the economy is, we live I think in two economies right now and it seems like the part that is weakening the part that needs to weaken some more it might not be quick enough to trigger a recession. So that's why I think the Fed needs to stand by their dot plots and deliver probably a couple more rate hikes, but we'll see what happens if we get some surprises with continued robust employment reports. And if inflation doesn't drop off as strongly as it should, then I think you'll start to see the argument for the Fed to lean again back towards the hawkish side will grow. And that should derail some of this risk rally we've seen.
Gary Siegel (
So if employment stays strong and inflation doesn't recede as quickly as expected, is there a chance rates could go higher than five and half percent or five and a quarter percent or five and an eighth percent that the Fed predicts?
Edward Moya (
I think there's still as far as the trends going with the economy I anticipate that we'll continue to see weakness across the service sector. I think that you're probably looking at most right now two more 25 basis point rate increases. I don't think you have a strong argument yet to raise above that I think the messaging has been fairly clear. I think there's been a lot of progress with these disinflation trends. So if all of a sudden in a month's time we're talking $100 oil, if we're talking about a return to some supply chain problems then I would change my tune. But right now I think that there's still a strong case for a couple more 25 basis point increases. But as the Fed said, they're going to be data dependent and I think that some of the trends remain and are expected to continue to show softness in the economy. So that should help support the argument that the Fed is getting very close to being done. I just need to see inflation be below 4% before I become more aggressive with that call.
Gary Siegel (
So talking about employment some firms recently, tech firms, finance firms have announced layoffs. Obviously those are not showing up in the statistics yet. Is employment going to be softer in the next month or two given what we've heard about layoffs?
Edward Moya (
I think across the tech space you'll definitely see layoff announcements start to get reflected in that some of these layoff announcements were targeted for the rest of the year. So you know, you might not see that reflected until the third quarter but I think overall you're going to see that I think across tech, these companies throughout the pandemic, they were ramping up hiring, they overgrew, they expanded too quickly and now you're starting to see that they have a better path as far as what should be their workforce size. And a lot of them grew a little bit too fast. At the time it was justified. So now I think you're seeing that being reined in and I think overall when you take a look at companies like Alphabet and Amazon, their workforce grew by significant levels over the past few years. So yes, they're announcing layoffs, but still when you take a look over the past five, 10 years they've been expanding the labor force from rather healthily and strongly.
(
So I think tech was ripe for a decent amount of layoff announcements and I think that will still be a strong theme throughout the rest of this earning season. But I think overall you're probably, I think that the key for the labor market is going to be more so when do we start to see that really impacted across the other sectors? As I highlighted earlier tech and Wall Street, those that layoff announcements mostly have been announced and I think that's been priced in but we need to see the rest of the service sector of the economy show that weakness. And if you take a look, some of the leading indicators like ADP and some of these other employment statistics ISM's service employment components we're not yet really seeing significant weakness. So I think that that can happen later in the first half of the year but I think there's there still we need to see more weakness. I think the unemployment rate needs to be above 4% before you can really start to become a little bit more confident in calls that the Fed's job is done.
Gary Siegel (
Since the COVID pandemic began, employers have had difficulty finding workers. Will this be part of the reason or would this be a reason that employers are hesitant to lay off workers going forward?
Edward Moya (
I think that's an excellent point because that's going to be the case for a lot of companies and I think that's why every Thursday when we get initial jobless claims, I'm always scratching my head, I'm like, they did it again. They impressed. This labor market continues to remain robust and these companies, if we're going to a soft patch right now because of all the effort and the struggle to find the right talent, they'd rather keep them, pay them. And even if the economy's in for let's say a couple bad quarters, they'd rather keep that talent on with them and instead of trying to rehire a year later where it might be much harder to find the right fit I think companies are going to be very hesitant for layoffs, especially for skilled positions. So this is a market that you're going to see strong signs of tightness.
(
I mean JOLTs at 11 million, that is pretty substantial and I think that you're not going to get I think any major immigration reform where you'll be able to see a lot of those jobs get taken. So I think we're looking at a labor market that is going to have strong underlying support for it to remain fairly hot. And I think this is a problem that the Fed's going to be battling because I think this is going to continue to drive those wage pressures and we'll see exactly how that unfolds over these next few labor market reports. But I think if the economy starts to only add 70,000 jobs a month, then I think that that would be something that's still that's not really driving those wage fears. But if we're still adding at over 150,000 I think the wage pressure, the average hourly earnings are going to remain stubborn and that's going to complicate what we see with these disinflation trends.
Gary Siegel (
So let's look into the future. The new SEP comes out in March. Where do you see the Fed going with rates and inflation and employment?
Edward Moya (
I anticipate that we're going to start to see a steadier increase with the unemployment rate. I think that policy is, it's starting to feel restrictive for a lot more companies. I think that the growth prospects are going to be a lot softer especially in the middle of the year. So I anticipate that the Fed is, we're now going to see more dissents. I think the dot plots are not going to be really in agreement. I anticipate that we'll see some arguing for one and done. I think that still I am anticipating that inflation will continue to decline, but not as quickly. I still think that the argument for two quarter point rate hikes is going to remain on the table and overall I think inflation is going to it's going to have a steady decline, but it's not going to be fast enough I think to warrant these rate cut arguments that we're seeing so aggressively get priced in.
Gary Siegel (
So you are thinking one and done and then they'll hold the rates for the rest of the year.
Edward Moya (
I anticipate that we're definitely going to get another 25 basis point rate increase and as of right now with the current trajectory for inflation, I think that they could be done after that March hike. If we get surprised and if we start to see a little bit of a loss of momentum not necessarily with this upcoming inflation report, but the following one, the last one before the FOMC meets, then I think that could complicate things. But I think that we'll definitely get rates to 5% and I think that's definitely restrictive enough. If we're arguing over a quarter point, I think the impact will be minimal. But I think we're definitely very close to the end of this tightening cycle.
Gary Siegel (
So what is the yield curve telling us about recession and should we believe it?
Edward Moya (
I think every day when I go into my fixed income mode and I'm looking at the tens and twos and I feel that these recession signals and warnings they're warranted but this recession is unlike any other and I think that given the fiscal and monetary response we got early in the pandemic, there's still residual stimulus that's flowing in the system. I think that in the end I think things will flatten and I think for when you take a little look at the curve, I really think we're going to start to see everything kind of both at the long and short end gravitate towards 3%. I think that that's where you're going to start to see the market. You become more fixated with over the short term over the next several weeks. If we see three for the 10 year, if we see three point 15 breached could we break below 3%?
(
Yes. Will that be sustained? No, I anticipate that we're going to remain kind of around the 3% level, but I think as you know, take a look at how volatile expectations for rates have been over the past couple years. No one saw this amount of tightening just 12 months ago. So I think you know to remain nimble in this market environment. And I think when you take a look at what some of the other central banks are doing I think there's good reason to anticipate that yields will remain heavy. I think you're going to have a lot of people that will go into fixed income. You're losing the Fed in China as the biggest buyers. So I think there's still going to be demand. So I think the important thing is to anticipate volatility, but I think a lot of people, they're looking at fixed income right now, they're saying like, well I'm actually getting yield for a lot of traders especially the young ones. They're not used to that. They're used to zero, they're used to rates near zero. And this is an environment where now you're probably going to see more investors become a little bit more at least the less risk averse ones be more content with getting a few percentage points here and there.
Gary Siegel (
Are you expecting recession this year?
Edward Moya (
Yes, I anticipate. I think we're going to squeak by with some growth in the first quarter. I think second and third quarter is where we'll start to really feel the restrictiveness of this rate hiking campaign. And I think that's when we'll start to see more weakness with the economy. So second and third quarter is where I think that's where the recession will happen. I think it'll be short, I think it'll be shallow but there are risks. I'm still concerned about a policy mistake by the Fed so we'll see what happens. But that's kind of my base case as of right now.
Gary Siegel (
So how would you rate the Fed's performance since the pandemic? What have they done wrong? What have they done right.
Edward Moya (
I thought the initial response, I think the coordinated effort it was so fast, it was well timed. It was what the U.S. and the world needed. I thought that the reaction function was I was very, very pleased with. But as far as assessing inflation, I think the Jackson Hole mistake, I think transitory will go down as a major strike against the Fed. And when they started this rate hiking campaign, you saw other central banks become right out the gates, more aggressive, I thought that was something it would've been, given how strong the economy was. Yes, there were risks. I remember the debate at the time but I thought they needed to become a little bit more, they needed to be aggressive in the beginning they maintained it and I thought they were very clear with their messaging on how these rate hikes were going to continue.
(
So overall would I give them, I'd probably give them about a C. I thought they did well in the beginning and I thought they had a couple big mistakes where they probably risked the recovery and I hope that they get it right. I wish they would've pushed back a little bit more yesterday. But I think overall they kept soft landing hopes alive where a lot of people didn't think that was possible. I thought they navigated through very tough times but I think the Fed always gets picked on. So maybe my C is a little bit harsh, but I think that I'm concerned that they still could have another mistake in them. So <laugh>, that's why they're getting a C.
Gary Siegel (
And when you say they have another mistake in them, you think by tightening too much.
Edward Moya (
I think I'm afraid that they might pause and then throughout the risk of tightening more I would've rather have seen them deliver 50 basis point rate hikes, said maybe we're going to do one more and then I think that would've been a better scenario to go into this market environment and then you have rates very restrictive. I think no one would've doubted that. And then you could have, let's see what happens with inflation. And now it's like we're tinkering with maybe one more maybe then another. I just thought it was ineffective. I think that they could have pushed back in some spots and I really want to make sure that inflation comes down and I thought that they got a little complacent at the end here.
Gary Siegel (
Well, in his press conference yesterday, Chair Powell said that in most tightening cycles they go 25 skip and then 25 again. This time they've raised every time. And again, it was probably needed that they raised every time because they started a little late. Monetary policy works with a lag, so they don't have time to watch these rate hikes go through the economy
Edward Moya (
Very much so. And that's why I thought they should have front loaded them a lot more. And given we're still feeling the impact of the earlier rate hikes, what maybe it's eight, 12 months because before you really feel the impact. So I think it's going to be a painful waiting game to see exactly how quickly the economy weakens, but the more the market becomes convinced financial conditions are going to ease that will complicate how quickly inflation falls. So we'll see what happens when we're talking again in the summer, but I think that there's probably a big risk here that the Fed is going to have paused and then they're going to say, well, inflation is proving to be a little bit stickier than we wanted it to be. And then can they resume tightening? And then at that point, are we then finally really feeling the brunt of these half point rate increases possibly. So I think it would've been better to have ripped the tightening Band-aid off and been much more aggressive and then I think you would've had much more confidence in the markets. But now it seems everyone's betting on that pivot.
Gary Siegel (
And again, the Fed is saying that they're going to be data dependent, which is why there's some uncertainty about whether it's one and done or two and done and no one really knows where the economy's going to go from here. This is all unprecedented because of COVID.
Edward Moya (
Very much. And I think that there's a lot of factors that will drive what will happen with inflation. What will happen with the growth outlook I mean even just this week alone, I think there's some question marks going up with can we even see China grow at all this year? And that's one of the major markets that will really impact a lot of what happens. So there's a tremendous amount of uncertainty that's going to remain. We're not going to have any clear answers after one or two inflation or employment reports. So you're probably going to see that markets will be very I think vulnerable to any shocks that do emerge. And I think that <laugh> it's impressive to see where we are right now as far as equities go and how low yields have fallen. I think that this has been an off to the races type of start to the year, but I think there's still too many risks on the table and they're going to remain on there for quite some time.
Gary Siegel (
Are there any risks you're particularly worried about more than others?
Edward Moya (
Well, I anticipate that you're going to see a lot of these commodity prices I still think that there's a good chance that you could have a commodity supercycle. I think that the demand might soften a little bit as we start to see large parts of Europe and the U.S. weaken. But as far as supplies go, so I think you're at risk of seeing some big swings higher with commodity prices, especially on the energy side. I think we've been lucky to have a warm start to winter. It will be a little bit longer according to the groundhog, but I think you're going to see that I think energy prices, the risk for $100 oil is easily on the table and I think that you're, as far as if we continue to see commodities rise and a lot of that could be also supported by a weakening dollar, which seems to be the trade of the year because 2022 was mostly strong dollar up until October until the peak yields. You're going to see that. I think commodities are going to be important to follow. I think if we see if demand does not demand outlooks do not deteriorate completely. We could see commodity prices really be a key inflation driver that I think a lot of traders are really not focused on right now.
Gary Siegel (
So what does all of this mean for the bond market and bond market investors?
Edward Moya (
I think you're going to want to take advantage of yield right now. I think that we're probably, I think the base case argument is that you're going to start to see as this economy weakens as I think there's, are there risks that default? Yes. Are there other concerns? Yes, but I still think that a lot of people are going to look at fixed income and say it's still pretty attractive and given a lot of the earnings risk and credit risk that I think are still there you're probably going to see I think investors you're going to have a lot of new investors this year in the bond market. And that's something that we're not used to hearing. I think that it's something that you're seeing millennials really look at for the first time. And I think that that's something that is going to be providing some strong demand I think in this first half of the year.
Gary Siegel (
So I'm going to take some questions from the audience because we have a few. How much is inflation being driven by excessive corporate profits versus people making too much money and the government spending too much money?
Edward Moya (
Well, I think that we had a tremendous amount of support and fiscal stimulus that got put in and that was a big contributing factor for inflation. When you take a look at in inflation, you have to, it's like an onion, you have to peel through the different layers, commodities the service sector though, that has been one of the key parts that is driving it. Rents have been it's what, 40% of core PCE. So I think there's a lot that I think has been providing these inflationary pressures throughout the pandemic. But I think that, you know, you have companies now that are seeing record revenues buybacks. For a company that was struggling like Facebook or Meta and then for them to announce a 40 billion <laugh> share back it raises some attention. It's like they have they're really dollar cost averaging because their prices have been pummeled.
(
So I think you're going to see that a lot of companies they're not necessarily putting their investments into growing their businesses, they're really focused on bringing shareholder value. And this is going to be one of those things that you'll hear debated for quite some time. But I think that as you have record profits I think that gives a way for people to still drive these wage earnings. So I think companies that they're going to cost cutting modes, but yet they're having very robust profit years. I think this is it ultimately should prove to be inflationary. So I think inflation's going to be difficult, especially on the service part of the economy. So we'll see how that unfolds and if the recession will do the trick to bring that weakness.
Gary Siegel (
Another question from our audience, are you for forecasting a profits recession?
Edward Moya (
I think it it'll depend by the sector. I think for the most part there was so much weakness priced in early and I think earnings still need to be, I think everyone's scrambling. I think you're going to have to see that earnings risk remains on the table. So I anticipate that you'll see steady downgrades going into next quarter and I think that you're facing a much weaker consumer. I think that what's not being focused enough about is just how much weaker the consumer is. I think that the disinflation process has begun, but after paying such elevated prices and dipping into savings, I think that you're starting to see much more weakness here. And I think you'll probably see a lot more weakness with these consumer discretionary stocks. And this is going to be I think one of those years where you're really going to have to be sector focused. This is not the year that you just blindly just go into the S&P 500 or NASDAQ or Dow. So I think small cap will probably do a little bit better throughout as a whole for the year. But no, this is a year that I think there's still a lot more volatility that should be anticipated and we might swing a lot higher initially then dip a little bit. And if we finish the year square then that would probably be what a lot of people are anticipating.
Gary Siegel (
The last question I'm going to take from the audience, what are your thoughts about global synchronized tightening and the BOJ bucking the trend?
Edward Moya (
Well, yeah, it's amazing because a couple jobs ago when I used to cover the European shift, I remember always just arriving to my desk when the BOJ was delivering their decision and it was like the easiest rate decision to cover. Now things are exciting. You're going to see them abandon yield curve control, you're going to see that you're going to have new leadership in place soon. So this is a key part of the market that brought in a lot of stability. So I think that you're seeing all the central banks, everyone's taking different paths. For the most part ECB is in rate hike, they had to play catch up with rate hikes. The BOE and the Fed, they're kind of in line. I think obviously the growth picture is a lot worse there. They still have doubled digit inflation for the UK, but I think you're going to see that both will probably stop at the same time.
(
Whereas the BOJ, this is the big wild card and I think you have a lot of people that have been early and happily early jumping on the yen trade. And I think that as we start to see they evolve their stance with monetary policy this is going to be very interesting. And you also have to take in that part of the world too you also have the PBOC, which is still providing more support and accommodations,so I think that this is a market that you're going to see I think for a lot of people really, really strong momentum coming out of Asia. I think for the BOJ though, this is most people that since they, they've put in some of these policies over the past several years that this is going to be a major I think change. And as you start to see the Japanese yields on the rise, I think you're going to have a lot of traders jump on that. So this is going to be a definitely one of the parts where you get more some of the more excessive volatility, I think especially in April when we get the new governor in place.
Gary Siegel (
Well, we've run out of time. I want to thank you, Ed for joining us and for your insights and thank our audience for joining us too.
Edward Moya (
Oh, thank you. It was great to do this and I look forward to the next time.
