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One more Fed rate hike likely 'later this year,' analyst says

The Federal Reserve's Beige Book notes that economic growth was 'modest' during July and August. U.S. Bank Asset Management Group CIO Eric Freedman joins Yahoo Finance Live to discuss the state of the economy, the possibility of additional Fed rate hikes, and the state of the consumer.

Freedman does not think that the next Fed rate hike will happen in September, but he does foresee a hike by the end of the year. Freedman said, "We think what's priced in is likely one more hike a bit later this year."

Video transcript

SEANA SMITH: Well, the Federal Reserve's Beige Book noting economic growth was modest during July and August. We also heard from Boston Fed President Susan Collins warning that further rate hikes could be warranted as the central bank looks to bring down inflation. This all coming ahead of the Fed's meeting later this month.

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Here to dig into all this and more, we want to bring in Eric Freedman, US Bank Asset Management Group Chief Investment Officer. Eric, it's good to see you. So certainly, it looks like investors are a bit worried about what exactly the Fed is going to do next. What do you think has already been priced into the market? And do you think the market is getting it right?

ERIC FREEDMAN: Hey, Seana, great to be here. And you always do a great job on the coverage side of the Fed. I'd say that what's priced in right now is probably the optionality of one more hike at some point later this year, but probably not at the September 21 meeting. So we think that the Fed recognizes that this inflationary issue is likely to hang around like bad company, probably around the holiday season.

So the concept that we're really focused on is what will the consumer be able to do. As a great coverage on the airline front, we think that is a good corollary into the rest of the sector set up as well, because the consumer is taxed right now. They are facing higher interest rates. They likely will face higher interest rates for some time. And there isn't really much relief in sight.

So, you know, we are seeing, again, very glass half full with the forward viewpoint. But we are starting to see some incremental chipping away, if you will, at consumer activity. And so if we see rates remain high and even get higher, which is certainly a possibility later this year, again probably not in September, that could lead to even more headwinds for the consumer. So again, we think what's priced in is likely one more hike a bit later this year. The Fed wants to keep their optionality up as high as they possibly can.

AKIKO FUJITA: Eric, when you're focused on the consumer, how dramatic a pullback are you expecting as we go into year end? I mean, this is typically, right, going into November and December, some of the busiest times of the year in terms of shopping around the holidays.

ERIC FREEDMAN: Yeah. It's a great observation, Akiko. It's one of those scenarios where we don't think this is necessarily a year where people are going to necessarily try to keep up with the Joneses from a spending standpoint. But we do expect to see that second wave of travel really be tested, both business travel as well as consumer travel. That's point number one is so we're going pullback, we think, will most likely be felt on the travel and leisure side. That'll be the first piece of evidence.

We do think that the consumer credit card data that we're paying attention to is showing some weakening trends as well. Again, not massively weakening, but, at the margin, consumers are spending a bit less. And when they are spending a bit less, they tend to extend credit. And some of their repayment activity has been slowing at the margin. So again, these aren't yet at concerning levels, but we think again the first step will be travel. The second step will be more consumer spending on other goods.

Also want to point out that, you know, we have to keep in mind that the replacement cycle for a lot of things we bought during COVID is starting to kick in. Normally, electronics have a three to four-year type of replacement cycle. Hard to think it was only four years ago that we started sheltering in place. But that is upon us as well.

So we're going to have a lot of good evidence to see what the consumer can do as we get deeper into this year and again early next year. We're glass half full, but we're certainly paying attention to some of the erosion happening at the margin.

SEANA SMITH: So Eric, here we are today with the S&P still below, back below 4,500. What do you think the activity then looks like between now and year-end?

ERIC FREEDMAN: Yeah. I think the range to pay attention to, Seana, is 4,600 to 4,300. Again, 40-- we're getting smacked in the middle of that range right now. We're trying to climb above the 50-day moving average, which we actually we gave away earlier today. That's about, you know, only 10 or 15 points higher than where we are right now.

So use 4,600 as the level. That's the July highs. If we do see a breakout above that, I think the market would be indicating that consumer is going to hang in there for longer than expectations. Below 4,300, that's where we get some concerns about the consumer staying power and what spending trends may look like.

So again, we would expect to remain in that range for some time. We think there's plenty of things to do in the market. We think we can get invested in energy. We think you can actually clip coupons to the shorter end of the curve as well. So use cash flow to your advantage in this environment, really pay attention to that range. 4,300, 4,600 is what we're thinking about from an asset allocation perspective.