Markets unfazed by econ. data, hung up on June rate cut hopes

Thu, Mar 14, 2024, 2:09 PM

Despite February's inflation prints, markets remain steadfast in their belief that the Federal Reserve will commence interest rate cuts in June. RBC Capital Markets Head of US Equity Strategy Lori Calvasina joins Yahoo Finance Live to discuss why economic data is forcing the Fed on a cautious path to rate cuts.

Calvasina notes that the recent lackluster data has forced investors to "ratchet down their expectations" significantly for rate cuts. She cites rising "concerns of inflation coming in hotter than anticipated," saying the muted market reactions to the February CPI and PPI data "make sense."

However, Calvasina points out that there has been "a stabilization in earnings estimates," suggesting a strong economy, which leads investors to believe "the Fed can't possibly cut." She notes that "the economic narrative has completely flipped." However, she points out that recession concerns are no longer a pressing issue.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

JULIE HYMAN: All right, let's broaden it out here as we look at stocks posting those modest declines as markets react to fresh evidence of sticky inflation. The latest PPI reading coming in above economists' expectations and seems to be another sign the Fed is likely to keep rates higher for longer. Joining us now, Lori Calvasina, RBC Capital Markets head of US equity strategy.

Lori, first of all, it's great to see you as always. Thanks so much for being with us. Not great news necessarily for investors today.

And what's interesting is you got CPI and markets sort of seem to shrug it off. Now you have PPI and retail sales. Jay Powell was looking for more good data. Are we getting now more meh data that's sort of adding up?

LORI CALVASINA: Yeah, look, first of all, thanks for having me. It's always great to see you as well and be on the show. But look, I do think that this is kind of meh data.

In fact, our rate strategy team did reduce the number of cuts they're anticipating from the Fed, from five down to three. And so they've, sort of, trimmed their outlook a bit. They've always been in the June start camp and they haven't deviated from that.

I do think other investors across the street have had to do a lot more ratcheting down of their expectations. There was this big camp for March. And we've really seen that the March cut camp has gone through some things over the last month or so. It hasn't been so pleasant to talk to those folks.

But I do think, as I talk to some of those people and we've, sort of, debated what the Fed's going to do with people over the last four to six weeks, I frankly have heard some concerns about inflation potentially coming in hotter than anticipated. So I look at the fairly muted reaction in the market that we've had to both CPI and PPI and it actually, kind of, makes sense to me. Because I do think there had already been a lot of worry among the equity crowd that maybe the inflation data was going to be a little bit bumpy on the way down.

JOSH LIPTON: Do you think, Lori, just to play on that point that maybe part of what's going on is kind of a narrative shift in that there was this story line, Lori, out there for a while? You know, well, the Fed's going to have to cut if the market's going to move higher. Do you think maybe now that's sort of changing and the focus is more, well, the economy is solid and earnings revision is moving in the right direction?

LORI CALVASINA: You know, we are seeing a little bit of stabilization earnings estimates the last few weeks. But we did see a little bit of a ratcheting down to start the year. That is not uncommon at all.

But I think what I've also noticed in client conversations is people who have been worried about whether or not the Fed is going to cut have generally phrased it as this, oh, my gosh, the US economy is so strong, the Fed can't possibly cut. That's sort of the extreme version of that. If you go back to last August, the concerns about the Fed were expressed a very different way. It was the Fed's just going to keep cutting-- or keep hiking. They're not going to cut and we're going to get a recession.

And so the economic narrative has just completely flipped. And if you look at just GDP forecasts themselves, they're around 1.6% in the middle of February right actually before I went on vacation for spring break. And when I got back from spring break, they had sprung all the way up to 2%.

And now they're at 2.1% right now. So we're seeing those economic forecasts move up very, very quickly. And I think even though there's all this Fed angst out there, people have really also been focused on the idea that this economy is not on the brink of recession the way a lot of people thought it was.

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