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Fed is ‘starting to starve inflation of the fuel it needs,’ Caravel Concepts CEO says

Caravel Concepts CEO Michael Jones and Martin Schulz, Federated Hermes Head of International Equity Growth Team, join Yahoo Finance Live to discuss recent inflation points, potential catalysts in China's property market and oil markets, and the outlook for stocks.

Video transcript

BRIAN CHEUNG: The Depository Trust and Clearing Corporation ringing the closing bell. These are the guys that process, clear, and settle your trades when you put them on Robinhood or any other brokerage. Rachelle.

RACHELLE AKUFFO: All right, well, there you have it-- your closing bell for the day, ending in mixed territory despite a strong start, as you see the Dow up just about 0.08 of a percent, gaining just 27 points on the day. S&P 500 also in about the same territory to the downside, 0.07%.

And the NASDAQ losing the most today at just over half a percent. Well, for more on the markets, we turn to Federated Hermes Head of International Equity Growth Team Martin Schulz and, of course, Caravel Concepts CEO Michael Jones joining us for this market panel. So, Michael, I'll first start with you. Does the concept of don't fight the Fed still work at the moment?

MICHAEL JONES: Absolutely. I think you are seeing the message that I think investors should take away from this week's economic data is that the Fed is at long last starting to starve inflation of the fuel it needs to keep spreading. Inflation is like a forest fire. It needs fuel to grow, and the fuel is money supply growth.

We printed a ton of money in 2020-2021. That led to 25% money supply growth and our current inflation problem. In recent weeks, though, the Fed tightening and the market reaction to that tightening has caused money supply growth to go negative. And we're starting to see the results of that in the PPI and CPI data. We're starting to turn the corner on the inflation problem because the Fed has turned off the pipeline of fuel to the fire.

BRIAN CHEUNG: So, Martin, I want to shift over to you just in terms of what we've been seeing in terms of the market action. Again, it seems like the inflation data remains the big story for yesterday and today-- CPI and then PPI respectively. What does that alphabet soup of inflation reports tell you about what the Fed is going to do next and how do you position yourself off of that prediction?

MARTIN SCHULZ: Well, thanks, Brian. I think market uncertainty is fairly high right now. Obviously, it's always looking for positive things in the market. And I think the CPI numbers recently have helped on that front. And obviously, since the middle of July, you've seen basically a run-up in 50% in the S&P, for example.

But from our perspective, the consensus is starting to get fairly positive near-term here. But I think at the end of the day, this may be a bear market rally. And so we look at the dollar, for example, it remains-- while it's obviously come down a bit here recently, it remains fairly high.

And that indicates to me that there's still a risk-off sentiment out there. And so the market is looking for positives, peak inflation, a Fed pivot, Chinese geopolitics in a better place, potentially. But at the end of the day, I think we're still worried about the Fed continuing-- in fact, Michael, what you just indicated is correct-- but obviously, when and if that pivot happens remains to be seen. And that's where I think this uncertainty remains high.

RACHELLE AKUFFO: And so, Michael, as we look at the commodities space, what is that signaling to you about where things are headed?

MARTIN SCHULZ: Well, you've seen some of the key forward-looking indicators of inflation-- oil, copper, lumber. They're all down 25%, 30% in the last few weeks. And I think that's a combination of the Fed starving the inflationary fire fuel. I also think it's these markets getting out ahead of a potential deflationary force that not many people are talking about.

While the global economy has been freaking out about our little inflation binge, China property markets have continued to collapse. And that is a huge source of core demand for some of these commodities. It's also a potential deflationary headwind for 2023, because the Chinese Communist Party is not just going to let all those construction workers, and steel workers, and construction equipment workers be laid off.

They're going to subsidize production and dump that excess capacity on global markets, probably sometime in the next 12 to 18 months. And so that's another-- the commodity markets are, I think, signaling that dramatic slowing that we're seeing in demand for raw commodities out of China and anticipating the potential deflationary consequences of continued collapse in Chinese property markets.

BRIAN CHEUNG: So, Michael, that's a really interesting kind of point that you bring up about that spillover effect there, because that implies that maybe inflation could fall a lot faster than people are expecting here. So what type of conundrum would that present to a Federal Reserve that has said, hey, look, we could still be hiking into the end of this year, and then stop, and then wait for a while? Does that square with, perhaps, a deflationary environment where the Fed might actually have to pivot on that maybe earlier than expected?

MICHAEL JONES: I think you're putting your finger on the big uncertainty that the market is trying to get its head around. And that is all these forward-looking measures of inflation have nothing to do with what the Fed is commenting on. The Fed, all the regional presidents, their minutes-- they're all focused on backward-looking measures of inflation.

And while those are definitely starting to peak, it's going to be months before you actually see them get anywhere near the Fed's actual targets. So the real risk is that the Fed ignores money supply growth, commodity collapse, the risks out of China, and just keeps tightening until we find ourselves into a recession. That's what I ultimately think the market is worried about.

Because on the good side of the economy, the payroll data is showing that employers do not want to lay people off this cycle. They've just had an experience of how much it costs their company not to be able to attract the talented workers that they need, and for the first time in my lifetime, they're going into a demand slowdown, not cutting first and asking questions later-- they're actually seeming to want to hang on to their workforce. So I don't think a recession is inevitable. But the Fed can make it so.

RACHELLE AKUFFO: So, Martin, do you think that markets are effectively and accurately pricing in some of these risks right now?

MARTIN SCHULZ: Well, Rachelle, that's the million dollar question. I think Michael just hit it on the head as well-- I think this is what the market is grappling with. That's why there's so much uncertainty. I think we've had this nice little run here. Some technicians are calling for a resurgence of the bull market.

But I think even in the US, you see that private demand is softening. Again, on the one hand, that's a very good thing, right, because we do want to see those inflationary pressures come down. But at the same time, these inflationary pressures remain elevated. And they will most likely on the global-- we look at the world in an international global manner, and from our perspective as we see it, we're definitely seeing a growing global environment.

And yes, China, for example, as Michael mentioned, has some tools, both on the fiscal as well as on the monetary side. But at the end of the day, global investors are worried about where not just the Fed, but also some of the other central banks around the world-- you have to remember some of these central banks are ahead of the Fed in terms of its rate structure, whereas others are way behind-- woefully behind.

And that may lead to further issues down the road. And the final thing I'll just mention is Europe is going to definitely be in a position of weakness going into the winter, obviously, with the energy situation. There's a high likelihood that this weekend that the Rhine River will shut down, and that will lead to some bottlenecks from everything from, obviously, transportation exports as well as energy coming in. So I think a lot of issues on the horizon.

BRIAN CHEUNG: A lot of issues to think about, for sure. Caravel Concepts CEO Michael Jones, as well as Federated Hermes Head of International Equity Growth Team Martin Schulz, thank you so much for joining us this afternoon. Appreciate it.