John Hancock Investment Management Co-Chief Investment Strategist Matthew Miskin joins Yahoo Finance Live to discuss the recent ECB rate hike, recession fears, inflation, commodities, the bond market recovery, and the outlook for economic growth.
Video Transcript
BRAD SMITH: --and that his team tosses around. Some food for thought this morning, though, with the ECB hiking rates and recession fears lingering. Joining us now with more on this thesis is Matthew Miskin, who is the co-chief investment strategist at John Hancock Investment Management. OK, break down the hashtag for us, why the team is tossing it around, and if that changes at all with what the ECB has put out this morning.
MATTHEW MISKIN: Yeah, thanks for having me on. And when we look at where we are in the economic cycle, we think we're in a late cycle. We're at the crossroads, crossroads between, really, the commodity complex seeing this nice rally to moving on to a bond market rally. And Treasury yields are still up massively since the start of the year.
Bond yields are up 3 to 5-- and they're yielding about 3% to 5% right now. If you can do 3% to 5% over the next six to 12 months, we would take it in a portfolio. And bonds, high quality bonds, investment grade bonds, higher in the capital structure, dependable interest, that's what we would hone in on in portfolios, as we likely see decelerating growth into the rest of this year into 2023.
JULIE HYMAN: Now, Matt, I know you're talking mostly about the US, but I got to ask you about the ECB today and how that kind of feeds into this thesis because I'm still trying to make sense of this new so-called crisis tool that they're employing to try to smooth out volatility that might result from their rate rises. How does that, then, kind of feed into your thesis?
MATTHEW MISKIN: Yeah, Julie, it actually makes no sense. So they're going to do-- we're going to do quantitative easing. That's what that new tool is. It's basically saying, we can do quantitative easing at any time whenever things go wrong. And we're putting that out there. But we're also going to raise rates 50 basis points. So quantitative easing is easing. And then they're raising rates, which is tightening. So they're basically trying to do two things at the same time, which doesn't make a lot of sense.
And the markets this morning, you saw that. The euro spiked versus the dollar about a percent, and then wore off right after. And it's kind of just lingering around here. But I think that's what every market is looking at right now and investors are looking at, is, saying, what are you trying to tell us here? Are you raising rates? Are you tightening? Or are you going to do quantitative easing?
At the end of the day, the ECB can't raise rates that aggressively or tighten that aggressively, or else, Italian bond yields. Italian bond yields are up 20 basis points this morning. And if they go up too far, too fast, they have fragmentation. Then they've got to bail out certain countries. And they don't want to get there. And so we actually think they're raising rates just to cut them again in the next 6 to 12 months.
BRIAN SOZZI: So, Matt, do you think a potential European recession ultimately puts the US into recession?
MATTHEW MISKIN: So the US usually is the powerhouse of global economies. And when the US goes in a recession, that's when, globally, recessions happen. The euro zone has gone into a recession without bringing in the US. 2011 was an example of that. I think global growth in general is in decelerating trend, whether it's China, Europe, or US. We actually think the US holds up the best, but unfortunately, we think it also sees a mild recession here at the end of the year, likely driven from a still tightening Fed, which really should be thinking about actually easing into 2023.
BRAD SMITH: And Matt, from what we've seen thus far this earnings season, it sounds like companies are pulling whatever levers they can to try to secure, or at least ensure, that their free cash flow is still going to be there, whether that's liquidation of some of their assets or selling off parts of the business. But how long can they sustainably do that? And when are they going to have to perhaps, in their forecasts and in their guidance, factor in an impending recession or one that's going to actually impact their business?
MATTHEW MISKIN: Yeah, I think that's a really good point. And what you're seeing is levers are being pulled to generate free cash flow this quarter. And it's the last kind of notch that you can pull, that last thing. OK, let's sell this, or let's trim that. And therefore, they're able to kind of not miss earnings estimates by that much. But as Julie was saying before, it's about the forward guidance. It's about what earnings estimates are going to be from here. And they're getting trimmed. And that, to us, that's what we're looking at.
And it's taken a while for earnings estimates to come down. Analysts have not woken up to this. And we do think that earnings estimates are going to be coming down. And that's actually what's going to drive kind of more volatility in the market after this kind of nice bounce we've seen in the last two weeks.
JULIE HYMAN: Matt, just to back up for a second, you had mentioned before that you think the ECB is only raising to cut. But then I think I heard you say you think the Fed should be easing back on the gas pedal, going into 2023 also. Do you think that they actually will?
MATTHEW MISKIN: So right now, there is rate hikes being priced-- I mean, excuse me, rate cuts. It's amazing. You anchor off rate hikes because you hear it so many times, right? But there is actually rate cuts being priced in the bond market next year, up to about 50 basis points of cuts. And I think that's right. I think that they're raising rates now. The Fed funds projections is a 350 Fed funds rate by the end of the year. I think that's way too aggressive, given where the economy is.
We look back at 2018, where the Fed was raising rates. Oh, and they're going to do quantitative tightening, too. They're going to try to actually put on the brakes even more into this slowing economy. Initial jobless claims rose to about 250,000 this morning. You got to watch the employment picture. Next year, they're going to be dedicated on solving unemployment, not inflation. And we think that's going to be a huge pivot that's going to ripple across the bond market into 2023.
BRIAN SOZZI: Matthew Miskin, co-chief investment strategist at John Hancock Investment, always good to see you. Talk to you--
