Market seems ‘very keyed in’ to 25-point hike in March ahead of Powell’s testimony: Strategist

Schwab Asset Management CEO and CIO Omar Aguilar joins Yahoo Finance Live to preview Federal Reserve Chair Jerome Powell's testimony before Congress this week and future Fed interest rate hikes.

Video transcript

- It is a busy week ahead, with Fed Chair Jerome Powell testimony before Congress kicking off tomorrow. Then we've also got the jobs report on Friday. Investors will be passing through the comments from Powell and also the data on Friday, trying to figure out what all this means for Fed policy. We want to bring in Omar Aguilar. He's the CEO and CIO of Schwab Asset Management. Omar, it's great to see you again here. So the 10-year yield breaking above a 4% level last week, trending just to the upside, just below that level this week. How does the recent move in the bond market and also pairing that with what we've seen in equities how that sets us up for what is going to be a very busy week?

OMAR AGUILAR: Yes. Definitely a very important and busy week, indeed, starting with tomorrow. Jerome Powell is speaking at the Senate and probably staying with the hawkish tone that he has had over the last several months and then waiting like anybody else about any confirmation with the jobs report on Friday. What is interesting about things, especially as you see the signals from the bond market, is the bond market's and the stability of yields in bonds has been a big driver of what has happened in equities.

If you actually take a look at once we got a little bit of stability at the beginning of this year, that's when we saw the big rally in equities. And since then, that sort of volatility that continued to permeate in the bond market because of that relationship of inflation and expectations for Fed decisions, that continues to drive a lot of volatility in yields that basically gets into the equity markets.

- You said you expect Jerome Powell to continue a hawkish tone. How do you expect the markets will then react to that? Haven't they already priced in three more 25s and a terminal somewhere north of 5?

OMAR AGUILAR: I think the bigger question right now is the market seems to be very keying into 25 basis points for March 22. I think what the market and investors will basically look into is, how hawkish is his tone tomorrow in combination with that jobs report? And I think that is what may determine the possibility of a 50 basis points increase in the next meeting. And that I think, indeed, is probably the biggest part of volatility that we're going to see. Whether it's going to go to 50 and the probabilities go higher depends on his tone.

Most likely, the discussion that we'll have is the fact that the economy continues to be extremely resilient. Consumers continue to be extremely resilient. And, therefore, that idea of being more hawkish and staying on the path of raising rates for longer and even staying longer is probably something that the market seems to be focusing on.

- Hey, Omar. The economy up until at least now it has remained very resilient. But if the Fed, what you're saying, does in fact get more hawkish over the course of its next couple of meetings, what does that mean then for the risk of a recession? Does that raise that risk that we've been talking about now for quite some time?

OMAR AGUILAR: Well, it's kind of interesting because over the last, I would probably say eight months or so, every discussion that comes down with recession comes into different flavors. And I probably think that, right now, we have probably seen those bold ballistic recession probabilities come much, much lower than what we have seen probably in the last eight months. And a lot of that is because if you think about it, there's portions of the economy that are already in recession. When you think about technology, when you think about housing, when you think about manufacturing, they have already seen that effect of their recession.

But I think what we have not seen is just that full-blown economic recession that happens at once. And this may be the way that we will continue to see. As we continue to see the effects of rising rates, that may be affecting more of the different parts of the economy as supposed to see like a big flow. And I guess that will qualify more like a semi landing as opposed to hard or soft. It will be more like this rolling landing that we're probably going to see and we'll continue to see going forward.

- So these rolling recessions you refer to will continue until what happens?

OMAR AGUILAR: Inflation. Inflation is the key driver.

- Right are we talking 2%?

OMAR AGUILAR: Well, the long run getting to 2% is probably way far away. But I think the signals that we're going to see from central banks, and particularly for the Fed, will be as long as we can actually see that there is a natural progression towards 2%, we're going to probably see that the market will start picking up that, and we're going to see the continuity. I would probably say the two areas that we'll need to continue to watch is that volatility in yield will determine a lot of what the expectations the market will have about the Fed decisions, as well as when we see that transition, and finally the stability of that service recession because if you remember, the goods recession started to come down.

And we saw that peak probably a couple of months ago when you would see the goods recession-- the good inflation starts to come down. However, the service recession is still there. Everything that has to do with services and those prices continue to go down. And you combine that with the fact that prices for commodities and for certain food prices are not coming down as fast as people want. I think we're going to see that. So to answer the question, as we actually go from this inflation to actually deflation, that will probably be the catalyst that will allow the markets to just be more stable.

- And, Omar, when we talk about inflation, a lot of that driven by the growth that we have seen in wages here we're going to get the latest reading on that on Friday. General consensus for overall jobs, right around 215,000 created. What are you expecting? And what are you expecting to see in terms of revisions potentially lower here for that January number?

OMAR AGUILAR: Yeah. My expectation is revisions will stay flat. I doesn't necessarily think that is going to make a big difference. And we expect wages to continue to go up. Again, that's probably not good news for equities and for risky assets. I think they increase cost of labor in combination with that lack of pricing power that a lot of companies use for getting good earnings numbers in the last year. It's probably going to put a lot of pressure on our margins.

That's going to put a lot of pressure in future earnings estimates. And we're already seeing the reports that we saw in the first quarter just show that that disinflation set up and that lack of pricing power is already affecting earnings. And at the same time, when you combine that with increased wages, and we expect that continuation in the report for Friday, we're going to see that margin pressure continue to be a headwind for equities.

- It will be an interesting number ahead of that last massive announcement. Omar, good to see you, sir. Thanks so much.