With the latest retail sales and expectations for the first interest rate cut from the Federal Reserve to take place in September, what does that mean for how markets may play out in the next couple of months?
Richard Bernstein Advisors director of fixed income at Michael Contopoulos to give insight into retail sales for June, what it means for consumers, the Fed, and what investors need to keep in mind moving forward.
“I think right now we’re very much in a range-bound market pretty much across the curve until you have something happen at the Fed, right? If the Fed cuts in September, which of course, the market is now pricing in, then I think you’re going to continue to get the yield curve steepening that that we’ve seen over the last several weeks. If the Fed doesn’t cut in September, then I think you can kind of bounce around in the range that we’ve been in.” says Contopoulos
Contopoulos also elaborates on risks in the market: “I think there are a lot of risks out there at the moment. One is, complacency that we are– really have engineered the soft landing scenario. If you look at container ship prices, for example, if you look at both candidates, I know there was a big discussion earlier about, former President Donald Trump, and if he’s elected, is he good or bad for business? The one thing is very clear, regardless of who is in office, you’re going to probably have inflationary policies, whether that be because of additional fiscal spending on infrastructure and things of that nature, whether it be because of tariffs and tax cuts.”
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Nicholas Jacobino
Video Transcript
Retail sales coming in flat for the month of June.
The better than expected retail sales print, moving the bond market this morning yields, pulling back just a bit.
Joining us now on the catalyst here for fixed income going forward, we want to bring in Michael Kos.
He is Richard Bernstein advisors, Director of fixed income, Michael.
It’s great to see you.
So let’s first start with the reaction that we’re seeing play out on the heels of the retail sales print this morning yields had been under more pressure.
We did see them pairing back some of those earlier losses.
I’m curious what you make of this morning’s reaction so far.
Yeah, I’m actually a little bit surprised that uh yields are, are, are coming down a bit here.
I mean, the retail sales data was actually, you know, quite strong and I think, you know, we’ve seen general so far in 2024 that data has surprised the upside.
I mean, certainly you’ve had some moderation in economic data as of late, but today’s retail sales doesn’t suggest that the consumer is falling off a cliff.
It and suggest that the modest rise in the unemployment rate is really a huge concern.
Um, and that, you know, the consumer is still strong and, and spending quite a bit.
So I’m, I’m a little bit surprised that the long end of the, the yield curve is, is down a bit.
But, you know, I’ve also come to realize over the last several years not to make a big deal out of, you know, a few basis points move in either direction.
So what do you think is the biggest driver though of the moves that we’re seeing on the long end of the curve?
And is it something that investors can brush off the way that you kind of are, or is it something that potentially is going on under the hood that investors need to be paying attention to?
Well, I think right now we’re very much in a, a range bound market.
Um, you know, pretty much across the curve until you have, uh, until you have something happen at the fed, right?
Uh If the fed cuts in September, which of course the market is now pricing in, then, you know, I think you’re going to wait to continue to get the, you know, the yield curve deepening that, that we’ve seen over the last several weeks.
Uh, if the fed doesn’t cut in September, then I think you can kind of bounce around, you know, in the range that we’ve been in and listen, we’ve been living very much in a range for the last, you know, four or five months, uh, on the 10 year, you know, I think that’s going to be between 4% and, you know, four and three quarters percent and, and the, and the daily data is going to move that on the margins for sure.
But again, until you get the big event, which is, of course, the Fed’s decision and what they end up doing, I think in September, yeah, I wouldn’t expect major moves in the bond market, you know, between now and then Michael.
I’m curious from your perspective though, are, are investors still a bit too complacent given some of that range round activity that we have seen?
And, and I guess what is that then signal just in terms of maybe the risk that that could point to here in the coming months because I think there, there are a lot of risks out there at the moment.
One is uh complacency that we are, you know, we really have engineered the soft landing scenario.
Um You know, if you look at container ship prices, for example, if you look at both candidates, I know there was a big discussion earlier about uh former president Donald Trump and if he’s elected, is he good or bad for, for business.
The one thing is very clear regardless of who is in office.
Um Yeah, you’re gonna probably have inflationary policies whether that be because of additional fiscal spending on infrastructure and things of that nature, whether it be because of tariffs and tax cuts.
And so I think there’s an under appreciation for the risks that inflation, um, you know, maybe doesn’t trend towards 2% quite as quickly as the market seems to think it will and uh that could end up happening at the same time as the Fed wants to get in a cut or two.
And so, you know, when I think about, you know, regardless of the political environment, either either candidate, how they up in office, I think the risks are to higher inflation rather than low inflation.
I think the risks are to a steeper yield curve rather than a flatter yield curve.
Uh And, you know, I’m not entirely sure the market has, has woken up to that quite yet.
So both candidates are inflationary.
What does that mean for the fed?
Come 2025?
Well, I’m glad I’m glad you asked come 2025 because I do think there will be an intermediate step where um the fed likely, you know, wants to get in a cut and will get in one or two cuts this year thinking that they have in, you know, in fact, slay the, the inflation dragon and, and what that ultimately may prove is that it was a mistake uh as you get into 2025.
Now, I, I think it’s certainly premature to say that they will have to tighten policy again, that they’ll have to raise rates again.
But is it a possibility that the market is not really considering?
I certainly think it is that you could see a, you know, late seventies, early eighties type of mistake where the fed prematurely cuts and declares victory only to have inflationary policies, um, really sort of, you know, bite them, bite them later.
And so it wouldn’t surprise me if the fed doesn’t cut as much in 2025 as the market expects unless you do get sort of the recessionary growth slowdown that I think no one is really expecting at the moment.
But it’s always sort of a, you know, a possibility waiting in the ether.
All right, Michael, thank you so much for joining us.
Really appreciate you sticking with us there.
That was Michael Kulas.
He’s Richard Bernstein, Advisors, Director of fixed income.