Latest / Markets with Megan: A Quick Financial Markets Update / The Dangers of Becoming Dovish - Celebrating the 100th Episode | Episode 100 | 02-08-2024

Transcript

The Dangers of Becoming Dovish - Celebrating the 100th Episode | Episode 100 | 02-08-2024 · Markets with Megan: A Quick Financial Markets Update

• 0:02
  Speaker 1: Hello, I'm Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors.
• 0:06
  Speaker 1: We're coming to you today with our 100th episode of Markets with Megan.
• 0:11
  Speaker 1: We're going to do something a little bit different today.
• 0:13
  Speaker 1: There hasn't been a ton of economic news this week to discuss, but there has been quite a bit of volatility in the markets.
• 0:19
  Speaker 1: We're going to talk about why and we're going to talk about the Federal Reserve.
• 0:23
  Speaker 1: What we're seeing.
• 0:25
  Speaker 1: We warned about this back in December.
• 0:28
  Speaker 1: Back in December, Federal Reserve Chairman Jerome Powell got dovish on the future path of interest rates.
• 0:35
  Speaker 1: The market priced in interest rate cuts as early as March.
• 0:39
  Speaker 1: Inflation was not where they wanted it to be, but obviously it's been heading in the right direction.
• 0:44
  Speaker 1: We warned at length in our publications, on these podcasts, of the dangers of getting dovish too soon and we're seeing that materialized now.
• 0:54
  Speaker 1: What we've seen since December and since he took that I guess you could say pivot, because they like to use the word pivot when it comes to the Federal Reserve when they pivoted and started to get interest rate cuts priced into the market we've seen economic activity rebound.
• 1:12
  Speaker 1: This is good.
• 1:13
  Speaker 1: This is great.
• 1:13
  Speaker 1: Nobody wants a recession.
• 1:16
  Speaker 1: The problem is we've often warned that inflation is extremely easy to reignite.
• 1:21
  Speaker 1: We saw this in the 70s and 80s when inflation was not a smooth road down.
• 1:26
  Speaker 1: There were several times where inflation went back up again and the Federal Reserve had to come in and adjust policy.
• 1:32
  Speaker 1: This Federal Reserve does not want to come back like the 70s and 80s and this stop and go policy, but unfortunately, by them getting dovish too soon, we're seeing this economic activity pick up and inflation indicators pick up.
• 1:46
  Speaker 1: Let me just go through a couple of things.
• 1:47
  Speaker 1: When you look at the ISM services index and remember that's where we spend most of our money is on services that just jumped back up into expansion territory.
• 1:59
  Speaker 1: You also have the prices paid in that index.
• 2:02
  Speaker 1: That's the prices we're paying on services that jumped the most since we've seen since 2012.
• 2:09
  Speaker 1: What is one of the three things the Fed has said is extremely hard and sticky to control with inflation?
• 2:14
  Speaker 1: It's service inflation.
• 2:15
  Speaker 1: We've seen the job market post really good numbers, actually in January.
• 2:21
  Speaker 1: We're seeing retail sales rising at the fastest pace we've seen in five years.
• 2:25
  Speaker 1: Consumer confidence has rebounded Again.
• 2:28
  Speaker 1: It's now at the highest level since December of 2021.
• 2:32
  Speaker 1: All these things can be inflationary.
• 2:35
  Speaker 1: This is a big risk that the Fed took by taking this dovish stance in December.
• 2:38
  Speaker 1: What we're seeing is the Fed's trying to backtrack that.
• 2:41
  Speaker 1: We saw it last week in their meeting.
• 2:43
  Speaker 1: We saw it in the 60 minutes interview over the weekend.
• 2:46
  Speaker 1: We're seeing many Fed speakers come out this week and try and backtrack those expectations for rate cuts.
• 2:52
  Speaker 1: We think that they're going to have to continue to do this.
• 2:55
  Speaker 1: They're going to have to continue to price this out.
• 2:58
  Speaker 1: We're worried inflation is going to rebound and that they may even have to come back in and adjust policy.
• 3:03
  Speaker 1: We'll be watching this closely.
• 3:06
  Speaker 1: The other thing is that when you look at it from the consumer standpoint, the consumers are optimistic and they're spending and it's causing prices to go up, but they're still doing this.
• 3:17
  Speaker 1: On credit cards.
• 3:18
  Speaker 1: We're seeing credit cards and delinquencies now at the highest rate since March of 2020, when the pandemic hit and we shut down the economy.
• 3:27
  Speaker 1: Auto delinquencies they're now at the highest level that we've seen since 2011.
• 3:32
  Speaker 1: The Fed's walking a very dangerous line here.
• 3:34
  Speaker 1: They need to cool these consumers.
• 3:36
  Speaker 1: They need for inflation to continue its trajectory lower and they're going to have to do that by being a little bit more transparent with what they're going to do with interest rate policy this year.
• 3:46
  Speaker 1: That's all I have today.
• 3:48
  Speaker 1: I want to thank everybody who's tuned in for these first 100 episodes.
• 3:52
  Speaker 1: We look forward to the next 100.
• 3:54
  Speaker 1: If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com.
• 3:58
  Speaker 1: Thank you.