Hooper: No Fed Hike in October, But Expect One in December

SPEAKER_1 (0:00)

Let's discuss more of the macro picture. Joining us now to do that is Kristina Hooper, Chief Market Strategist over at Man Group. Good morning, Kristina. All right, hot CPI, hot PPI, retail sales coming in higher at the headline, but softer at the core. What is it telling you?

Kristina Hooper (0:18)

Well, it's telling me that this is an economy that's coming under greater pressure, especially when it comes to affordability, because what we've seen is, for example, a CPI print headline up 3.7 percent year-over-year, but in our most recent jobs report, what we got was wage growth, average hourly earnings at 3 percent year-over-year.

Wages are not nearly keeping up as much as inflation, and that's a real problem, and that's why we're seeing an increasing number of consumers coming under pressure. We heard from a dollar store CEO last month that middle-income consumers are behaving more like lower-income consumers. There's just more pressure and it's creeping up in terms of exposure to households.

SPEAKER_1 (1:10)

So how difficult does this then become for the Fed? Because obviously, you've got rising inflation, but a consumer who doesn't feel that good about things. Obviously, we saw the 30-year fixed rate picking up yesterday, 7.56 percent. Now, we know that that's likely to weigh on the outlook for the frozen housing market in the near term as well. So how do they address things without applying more pressure on the parts of the economy that are already struggling?

Kristina Hooper (1:42)

Well, that is the $64,000 question for the Fed. The most difficult environment when you have a dual mandate is one in which you're seeing inflationary pressures and also the economy is starting to weaken. So clearly, the Fed is making inflation its first priority. We've heard a lot of tough talk coming from the Fed share, the new Fed share this year, and I think that is going to continue to be their priority. But you're right, when you raise rates, you can put pressure on households. One way to avoid that is to raise rates at the same time that you perhaps conduct some form of QE, or the Treasury is buying bonds on the long end, to at least ease those upward yield pressures for the long bond, which of course impacts mortgage rates. But it's a very difficult juggling act, and of course, the Fed is not interested in doing any kind of what I would call unconventional monetary policy like QE. I mean, we've heard that loud and clear from the Fed chair for years now.

So it's going to be about cutting inflationary pressure by hiking rates, and then when things normalize, then we can go back to an environment in which mortgage rates are arguably lower.

SPEAKER_1 (3:08)

So where is the market at right now, Kristina, as far as its assumptions for what happens next? Because I mean, we've seen the October rate hiking bets jumping all over the place since that CPI print yesterday. I mean, we've gone from 20% to a coin flip back to now around 30%. I mean, does that speak to the lack of forward guidance that this market is getting? That obviously, it's just making these adjustments based on how it's digesting the data day by day?

Kristina Hooper (3:36)

Well, I certainly think that's part of it. Without forward guidance, it's a lot harder to discern how the Fed will react. I also think we saw a pretty significant change between the CPI print and the PPI print. The market reaction to the CPI print was that it increased the probability of a Fed rate hike in October. But with the PPI print, that has changed. I think a lot of it has to do with concerns around a reduction in AI capex, that we could actually see a slowing economy because we may not see as much investment as we have seen. That's AI related and that could be very problematic.

My view is that we're unlikely to see a rate hike in October. It's a week before the midterms.

But that we are going to get a rate hike in December, that the Fed is still very focused on fighting inflation. It wants to have a lot of credibility when it comes to fighting inflation and so I think it will continue full speed ahead and really try to put blinders on and not worry so much about signs of weakness in the economy.

SPEAKER_1 (4:47)

Interesting. Obviously, as far as what you guys are speaking to clients about, I'm just wondering exactly what you're telling them in this higher inflationary environment where prices are looking pretty sticky. It's been interesting that the twist in all of this is that while the macro is applying pressure, we are seeing this bid for bonds. We certainly saw that yesterday.