Principal Global Investors Chief Strategist Seema Shah joins Yahoo Finance Live to discuss the June jobs report, wage growth, rate hikes, recessionary risks, inflation pressures, and the outlook for global markets.
Video Transcript
- There's a lot for investors to digest coming off the June jobs report, which showed an increase of 372,000 jobs in the month. Seema Shah is a chief strategist at Principal Global Investors and joins us now. Seema, great to see you here. Everyone that we've talked to so far this morning suggests the Fed might pause on rate hikes later this year, but do you think we could start building the argument they should be pausing sooner? We saw downward adjustments to jobs for April and May, you saw wage growth that didn't look too hot in June, so why keep pushing forward?
- Hi, thanks for having me on. I guess we're taking a very different take to that. If anything, we see the latest job market data as further evidence that recession is not upon us, certainly the risks are still there. We do believe that there will be US recession in 2023.
But as long as you have inflation pressures as high as they currently are, I think it's a very, very difficult question to ask the Fed to stop at this point. So we are expecting further significant tightening from the Fed through the end of this year and certainly even into early 2023 too.
- How difficult does the rest of the second half of this year look to you? And based on your forecasts, what would the consumer be feeling? Because consumers right now are also already having this thought of a potential recession. And so, if this continues to persist by the end of the year, what's the mind frame of the consumer going to be like in a 2/3 consumer driven economy?
- Yeah. You know, unfortunately it's really the consumer which is being pressured the most through this inflation crisis. Price pressures, as you've been saying, across every single good that you look at, prices are up. And then households are clearly feeling the strain. If you look at, for example, some of the lower income households, their savings are actually back below where they were pre-covid.
So they have, unfortunately, time and inflation has completely eroded what they built up during the COVID crisis. So there are certainly very significant challenges. And, unfortunately, Fed tightening is going to add to that because they're going to be raising mortgage rates. And, of course, that's going to be an additional challenge. But, unfortunately, this is the process that the Fed will need to go through in order to tone down inflation and take away some of these price pressures. It's certainly a short term pain for households.
- And Seema, just something that you mentioned, you mentioned that consumer savings are actually back below some of the pre-covid areas. Why is it then that we're hearing from some economists and analysts that are looking at the same consumer and saying that their balance sheets are strong?
- So it is a good point. So when you look at your aggregate consumer, your average consumer in the US still has some savings to fall back on. So even as things get tougher, they're able to rely on their savings to support them. And that is one of the key reasons why consumer spending in the US, and actually a lot of parts of the world, has been quite resilient through this slowdown.
But unfortunately for some of the lower income households, they are back to where they were pre-covid and you're starting to see that same dynamic form for the household with slightly more wealth than that lowest income. So this is a dynamic that we're seeing, which is pushing the lower end of the household income space. And, unfortunately, that does feed through to the rest of the economy. So, yes, consumer spending has been a support to this point, but that support is being eroded quite rapidly.
- Seema, you mentioned a few times that we will continue to see significant rate hikes. How many rate hikes you think are left in this cycle?
= So we are expecting a policy rates to rise to 4.25% by the second half of next year. That is probably about 25 to 50 basis points, probably slightly higher than what the market is currently expecting. But what we should learn from today's data is that the US economy is still very strong. And as long as it's still very strong, then inflation pressures will continue to brew.
So the Federal Reserve really needs to create some of that weakness, they need to create labor market slack in order to pull away some of those inflation pressures. So as a result of this continued strength in the US economy, that is the reason why we are anticipating further hikes beyond what the market is currently expecting.
- How should people be positioning their portfolios right now?
- Yeah. This is a very, very difficult time for households and also, of course, for investors and trying to understand where to look at. The one standout performer to us, though, is still real assets. So when I say real assets, I mean commodities and infrastructure. They are very, very strong mitigators against inflation. So if you need protection, if you are concerned about those inflation pressures, typically you should look at the real assets.
And specifically for infrastructure, that's also where you get that consistent and stable income stream. And as we know, as you get deeper and deeper into this economic downturn, it's really that consistency of income that you're going to be looking for. So those are the two areas that we like the most.
But also within fixed income, within the bond space, it's time to turn defensive, right? Core bonds, investment grade, anything which is higher quality should perform better in this environment, certainly than your higher yield and low quality space.
- All right, commodities off their peak, but we'll continue to watch those, of course, very closely going forward from this point. Seema Shah, chief strategist over at Principal Global Investors, always a pleasure to get some of your insights. Thanks so much for joining us.