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There's still a 'disconnect' between consumer spending and sentiment forecasts: Expert

J.P. Morgan’s Chair of Global Research Joyce Chang joins Yahoo Finance Live to discuss the market outlook amid Fed rate hikes, economic data, gas prices, laborforce pressures, China's growth slowdown, and semiconductor trends.

Video transcript

- Well, joining us now for more on the markets is Joyce Chang, JP Morgan's Chair of Global Research. Thank you for joining us today, Joyce. So markets seem to be digesting a lot from where we were on Friday with the jobs data, ahead of then waiting for the CPI data to come out. How would you describe, really, the market sentiment right now?

JOYCE CHANG: Well, I think the market really is debating what kind of landing are we going to have. And a soft landing is still a hard task. The jobs number made it very clear that the Fed still has a lot of work to do. And we do think that its 75 basis point hike that they're going to have to do in September. As well two more, 25 basis points, in the next two hikes after that. And a terminal funds rate that will have to go to 3 and 3/4%, maybe even 4%.

So that's what the market is debating. And all eyes are on the CPI report. Now, we think that the number will come in at around 8.7%. So that's one where it's still going to keep the Fed on high alert, and that's why we think it's 75 basis points for the next move.

- Yeah, how dramatically do you think gas prices having fallen more than 50 days in a row will keep that number down? Is there any number tomorrow that could change the calculus of the Fed at this point?

JOYCE CHANG: I don't think that you're going to see the calculus for the Fed change because I think for the Fed to turn dovish, you would actually have to see a change in the unemployment numbers. And that's just not going to be something that will play out over the next couple of days. And on sinking gas prices, we're looking at a market that's pretty much in balance right now.

We've actually seen a drop in oil demand, about 1.2 million barrels per day. And the gasoline demand actually coming down was a big surprise. So I don't see the pressure so much coming from gas prices. I think the focus still is the jobs number, the unemployment, which is at a 50-year low at 3 and 1/2%. And I think for the Fed to turn more dovish, you would have to see a change in those labor market conditions.

- Hey Joyce, in a note out this morning, Citi was saying that an index of global sell side ratings is quote, "back to peak bullishness levels reached back in 2000 and 2007. " And that to them is a red flag. Is investment sentiment, is it too bullish at this point, given some of the headwinds that we've been talking about?

JOYCE CHANG: Well I mean, I think what is really different about what we're seeing in the economy is that the spending is up. I mean, we really come out of COVID with excess savings, which have really held the consumer up. So you've got consumer spending that's up, but on the other hand, you have consumer confidence that's down, and business confidence that's down. As we look ahead at all of the geopolitical risks, the US-China tensions, and also just the ongoing fallout from Russia and Ukraine.

And so it's these two dichotomies that are in place right now that there is a disconnect between the actual spending patterns and what we're actually seeing in the economy, and the sentiment and confidence going forward. And we've looked at some of the data more closely, we are also seeing that 35% of households are now saying they're having some trouble paying their bills. So the pressures of labor cost pressures, wage pressures, are ones that are going to stay top of mind here.

- And Joyce, you mentioned geopolitical issues. And of course, the issue of China, obviously between the US and China over Taiwan, but also the US and China over its role in Russia and what's happening in Ukraine. What are the biggest things that you're watching in the Chinese economy because obviously the IMF, the World Bank, really expecting China to be the real growth engine for the global post-pandemic recovery.

JOYCE CHANG: Well, we're looking at growth in China just a little bit over 3%. So this is actually one of the weakest growth numbers that we're seeing out of China, even though we do see that they have more leeway than many other economies right now. They don't have an inflation problem, they have the ability to put stimulus into place, and even to do some policy easing. But the property sector is still under enormous pressure for many of the large property developers when we've taken up the default rate.

We've also had a slowdown in consumer spending because of the COVID lockdowns, and I don't think they're out of the woods on this yet. And I think that we are really also seeing that unemployment amongst the younger Chinese population, 12 million college graduates under 25, unemployment levels that are 16% to 18%. So there is a confidence problem in the middle and upper class in China right now, given some of the challenges that they are facing.

Growth that's still going to come in better than in some of these other parts of the world in the third quarter, but a 3% number for China is still a pretty difficult number when we look at the full year forecast that's ahead.

- Indeed. And given all these uncertainties both here and abroad, what strategy do you recommend going into all this? Well, I think that we still see that Treasury yields are going to move up. I mean, we have the two year, we've actually taken the forecast up a bit as far as the short term yields. Although we haven't really changed our 10-year yield, we have it at 3.1% at the end of the year.

But in the equity markets, we like growth over value right now. And we are seeing that in certain sectors, like staples, they are at sort of all time valuations and defensives that, you know, make us more cautious right now, just as far as the premium that they're trading at. We think real estate could face more challenges, health care, staples, more challenges. And so would favor growth over value here.

- Joyce, what's your takeaway from some of the warnings that we've seen from those big chip names over the last 48 hours or so. We had Nvidia out yesterday, Micron warning of falling demand for their chips today. We're seeing that reflected in all the names that we have up on our screen right now. What does that tell us just about what we should be prepared for over the next couple of months?

JOYCE CHANG: Well, I think that we do have to prepare for a slowdown in the US economy. And that as we look into 2022, the end of 2022, and 2023, we have third quarter growth at only 1%. So even though the consumer is still in good shape, households are still in good shape, are we really looking at something that's below potential growth? And I think there's still concerns on some of the supply chain issues as we look at the tensions that are playing out around Taiwan, US-China relations.

And we did have also the Chips bill go into effect to support the semiconductor industry. But this is something that takes place over a multiple year time horizon. So I think the story still will be on the growth outlook, the tightness of the labor market, and really just what will it take to bring inflation down. Because even if we see that the inflation numbers show some improvement on the cyclical side, I think structural inflation is still a problem that's here to stay with the Fed still having to stay on high alert and 75 basis points.

- Still a long way to go for the Fed. Joyce Chang, JP Morgan Chair of Global Research. Appreciate you being here. Thank you.