Federal Reserve Chairman Jerome Powell began two days of testimony before the Senate on the state of the economy, offering a potential signal about how the central bank might make policy decisions going forward.
Deepak Puri, Chief Investment Officer of Deutsche Bank Private Bank, appears on Catalysts to discuss Chairman Powell’s recent comments and what they mean for the markets going forward.
“There is a 75% chance of a rate cut in September, which I think is a pretty good sign. However, I would like to caution our listeners against thinking of a rate cut as a panacea for further market rallies. Look what happened with the ECB. They cut rates on June 6 and eurozone stocks have fallen 2.5% in the past month. So a rate cut is not necessarily a catalyst for further stock market rallies. I think there are many other factors at play. There is a saying that goes, ‘don’t fear a pause, fear a rate cut’ because there are still a lot of unknowns in terms of rate cuts, magnitude and duration,” Puri told Yahoo Finance.
To learn more about expert insights and the latest market trends, click here to watch this full episode of Catalysts.
This post Nicholas Jacobino
Video Transcript
I’ll take you to the park too.
He, George Banks, Private Bank of America.
CIO: Thank you so much for joining us today.
park.
I want to talk about this statement that Jay Powell is trying to make right now, that if we move too slowly, we could do an undue amount of damage to this economy. If you were in that role today, and for the rest of today, how bullish is this for the markets today?
yes.
Thank you Madison for inviting me.
I think these comments are not that different from what Chairman Powell said to Sintra at the forum last week.
And the Fed will now be feeling pressure to improve labor market data, which is starting to come in much weaker than expected.
Just to give you an idea.
The unemployment rate is currently at 4.1%, but the median in June was 4%, so we have a bit more of a foundation to start discussing lowering interest rates.
As the reporter said, there is a 75% chance of a rate cut in September, which I think is a pretty good sign.
But I want to caution our listeners to keep in mind that a rate cut is a panacea to get the market going again.
Look at what happened with the June 6th interest rate cut. Euro stocks are actually down 2.5% over the past month. So a rate cut doesn’t necessarily spark further stock market gains.
I think there are a number of other factors at play here. There’s a saying that goes, “fear cuts, not pauses,” because there are still many unknowns about the size of the cuts, their duration, and whether they’re actually neutral.
So the market will be faced with these questions.
Deepa, those questions arise at a time of interest rate cuts.
Given the rate cuts that you just mentioned and the comparison with the current situation, do you foresee a similar development in the U.S. in terms of the immediate pressure that we see in the market?
Of course, I think we all know that the economy can withstand higher interest rates, so I think we should all have a little bit of confidence on that front.
But fiscal stimulus may be missing this time.
And why do I say that?
This is an election year.
No matter who enters the White House next year, the same kind of deficit spending that enabled a strong post-pandemic recovery is unlikely to materialize.
So the first case is that the markets overtightened monetary policy in response to fiscal stimulus.
But if monetary policy remains tight and restrictive and there is no fiscal stimulus, how will the economy respond?
That’s a big unknown.
That’s a big question mark.
So I don’t want to get swept up in the narrative that lowering interest rates is really going to start solving all the problems with the deficit and the market will go up in a straight line.
From here onwards, I’m curious to know.
So what are you thinking?
Not just looking at the upcoming earnings cycle, but the third quarter earnings cycle, some analysts have said they expect the third quarter to be volatile.
What do you think?
I think the high point will be in the second quarter.
That means that in terms of year-over-year EPS growth, the second quarter is expected to see a 9% increase, putting the spotlight back on big tech companies.
The week of July 22nd is expected to see a 30% increase compared to a year ago.
On the earnings side, I think it’s easy to see when you look at the back end of the Madison Index that things are going to start to ease up a little bit, especially given the length of the monetary tightening that we’ve seen, and it shouldn’t continue at a 9-10% pace.
While there is some cause for optimism, most companies still say pricing is better than expected so they aren’t actually making capital expenditures.
The reality is that there is not as much hiring happening as you would hope, and the labor market statistics I just quoted are a good example of this.
So I think we’re going to see relatively good numbers this year.
It is expected to hit $245 in lunar 2024, but could fall to $265-270 next year.
Therefore, the earnings environment is not bad.
but.
It will be very sector specific, industry specific.
So being a little more proactive can give you more meaning and a deeper understanding than what you just said.
Given that the earnings bar has been set so high this quarter, companies that beat expectations will be beating market expectations.
Wouldn’t they historically be rewarded at the same rate?
I think it will be, because we are in a lower growth environment, and so in a lower growth environment, growth is precious.
So investors are likely to reward companies that grow market share, have sales that beat expectations, and have pricing discipline.
So I think all of these things are very important.
That being said, we wouldn’t rule out the tail either.
About 20-25% of earnings reports over the past few quarters have mentioned I as a possible way to gain market share.
I think that trend will probably continue this time around.
Yes, Diop Kuri, I’m glad you’re here.
Chief Investment Officer, Deutsche Bank Private Bank, Americas.
thanks so much.
