Despite February’s inflation record, the market remains firm in its belief that the Fed will begin cutting rates in June. Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, appears on Yahoo Finance Live to discuss why economic data is forcing the Fed to take a cautious path to lower interest rates.
Calvasina said recent lackluster economic data had forced investors to “drastically lower their expectations” of rate cuts. He cited growing “concerns that inflation will be higher than expected” and said it was “understandable” that markets had reacted subduedly to February’s CPI and PPI data.
But Calvasina noted that “earnings expectations are stabilizing,” suggesting the economy is doing well, and investors believe “the Fed is unlikely to cut rates.” “The economic narrative has completely flipped,” she points out. But she points out that fears of a recession are no longer a pressing issue.
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor’s note: This article was written by angel smith
video transcript
Julie Hyman: Now, let’s expand on the topic and look at the stocks that have experienced such modest declines as markets react to new evidence of persistent inflation. The latest PPI readings were above economists’ expectations and appear to be another sign that the Fed is likely to keep interest rates on hold for a long time. I’m now joined by Lori Carbasina, head of U.S. equity strategy at RBC Capital Markets.
Lori, first of all, it’s great to see you as always. Thank you very much for joining us. That’s not necessarily good news for investors today.
What’s interesting is that even though the CPI is out, the market seems to be ignoring it. Now we have PPI and retail sales. Jay Powell was looking for better data. We’re getting a lot more so-so data now, and is it adding up?
Lori Calvasina: Yeah, look, first of all, thank you for having me. It’s always great to meet you and be on the show. But look, I think this is some kind of boring data.
In fact, our interest rate strategy team has reduced the expected number of Fed rate cuts from five to three. So they sort of set their outlook a little bit, in a way. They have always been in the June start camp and have not deviated from that.
I think other investors across the street have had to lower their expectations even further. There was a large camp in March. And we’ve really seen the March Reduction camp go through some things over the past month. It wasn’t all that fun to talk to those guys.
But as I’ve been talking to some of these people and discussing what the Fed is going to do with people over the last four to six weeks, frankly, the likelihood of inflation rising even higher. I think I heard some concerns about it more than I expected. So I looked at the market’s fairly quiet reaction to both CPI and PPI, and that actually makes some sense to me. Because I think there was already a lot of concern among equity investors that the inflation numbers were going to be a little choppy along the way.
Josh Lipton: Lori, just to play around with that point, I think part of what’s probably going on, Lori, is some kind of narrative shift in that this storyline has been there for a while? As you know, if the market goes up, the Fed will have to cut interest rates. Do you think perhaps that is changing now and the focus is on the economy being strong and the earnings revisions going in the right direction?
Lori Calvasina: As you know, we’ve been seeing a trickle of stabilization earnings projections in recent weeks. However, towards the beginning of this year, I noticed a slight decline. That’s not at all unusual.
But what I’ve noticed in my conversations with clients is that people who are worried about whether the Fed will cut rates commonly express it like this: It probably won’t cut. That’s an extreme version of that. Back in August of last year, concerns about the Fed were expressed in a very different way. The Fed was going to keep cutting rates or keep raising rates. They’re not going to cut back and we’re going to go into a recession.
And the economic narrative has completely flipped. And if you look at the GDP forecast itself, he was actually at about 1.6% in mid-February, right before I went on spring break. And when I got back from spring break, they had gone up to 2%.
And now they are 2.1%. So you can see these economic forecasts rising very quickly. And people are actually paying attention to the idea that despite all the Fed anxiety out there, this economy is not as on the brink of recession as many thought. I think it is.
