Positioning for a Fed Hike and a Potential AI Slowdown

SPEAKER_1 (0:00)

Thanks so much for that, Marlee. Yes, joining me here at the desk of the New York Stock Exchange is Scott Ladner, who's the CIO of Horizon Investment. Scott, thanks so much for your time today. Let's kick things off with what we're likely to hear tomorrow. I mean, the market is pricing in a hike. I mean, they think that it's pretty much a done deal. Would you suspect that it's more hawkish or dovish from what we hear from Walsh tomorrow?

Scott Ladner (0:20)

Well, yeah, the hike's a done deal already. He's not going to surprise markets on that side of things. And if he does surprise markets and they don't hike, it would probably be a bloodbath.

You probably get 10 years up by 20 basis points.

But after that, then the game really starts. The game is the press conference. Walsh is having the same types of problems that every other new Fed chair has had with the communication style standpoint. They all mess up the communication part in their first six months on the job. They can't get their feet out of their mouths, essentially. So hopefully, he's able to do that tomorrow and hopefully, he'll be able to communicate something that is, that we're in a mid-cycle adjustment rather than at the beginning of a series of hikes.

SPEAKER_1 (0:56)

So if the feeling is that we're going to see a yield spike on the long end, I mean, if they don't hike, and obviously what we got with that CPI report last week, is the Fed being forced into this position to hike, do you think?

Scott Ladner (1:07)

A little bit, yeah. I mean, look, they're definitely getting bullied by the market right now.

That part is pretty clear, and that's okay. I mean, I personally don't think that they really need to hike. I don't think this is a demand sort of push thing that the Fed could really control. But, that said, it is what it is. And one or two 25-base point hikes at the front end of the curve is not going to derail the earning picture, it's not going to derail the economy. It'll be all right.

SPEAKER_1 (1:28)

Okay. And as far as that commentary in the afternoon, I mean, with that press conference, I mean, guaranteed that you did get that hike, I mean, whether he comes out sounding hawkish or dovish, I mean, how do you think the market is likely to trade the press conference?

Scott Ladner (1:41)

Look, I think if he comes out and we get some language or feel that this is really is kind of like a mid-cycle adjustment type of thing, we're talking one, two, maybe three on the top side hikes, then that's kind of what people are thinking and that would probably be okay. So the market probably trades pretty well off that. You probably see long rates come down, see equities rally, then that's sort of the all clear.

But if he does come out and says, it like intimates that maybe this is the beginning of a series of hikes, and this could go on much longer than the market is forecasting. Okay, now we're going to call into some kind of question the growth picture. And that would not, you probably see long rates come down, they'd be coming down for the wrong type of reasons, become not really growth scare reasons.

SPEAKER_1 (2:20)

Right, because there is an argument to suggest that yields are higher for good reason because the economy has been resilient. Can stocks continue to be resilient though, do you think for equities in the face of a tightening cycle?

Scott Ladner (2:32)

In the face of a tightening cycle, we're talking like 100, 150 base points of worth of hikes, like that would start to be challenging.

SPEAKER_1 (2:37)

What about just getting rid of the insurance cuts?

Scott Ladner (2:40)

I think that's what the market is really wanting. I think that would be sort of the, you'd probably get a relief trade in equities, if you get that kind of outcome.

SPEAKER_1 (2:47)

Kind of like we saw off the back of the CPI, it was kind of like, this is confirmation, we're going to get this rate hike maybe next week. This is what the market has been trying to position for.

Scott Ladner (2:54)

Yeah. Just say, hey, listen, Fed, you're super independent, your credibility is high. Just go ahead and do the easy thing. The easy thing is to get one or two of these cuts out of the way, and sort of forget about it for a while.

SPEAKER_1 (3:04)

Okay.

What about now this AI slowdown talk? I mean, this is just like an added pain point, it feels like, for the markets. Do you suspect that it has any impact on capex down the road or earnings revisions? I mean, if we are talking about a slowdown, because the markets have been able to shrug off, $100 oil higher rates because the earnings revisions have been so good.