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Federal Reserve Chair Jerome Powell just announced a 50 basis points hike in May. Tony Nash was called in to explain what will happen to markets when this happens.
CNA: Tony Nash joins us for chat now. He’s founder and CEO of Complete Intelligence. So, Tony, we’re getting Powell explicitly saying that a half-point hike is on the table for the May meeting. The Fed, as you said and pointed out during the break, getting really serious about aggressive tightening. How do you think markets are going to have to come to terms with it for the rest of the year?
TN: People say that it’s already priced into markets. It’s not really priced in until it happens. So there is an expectation that certainly May and June will be 50 basis point hikes. But we’re not really sure about July. But again, people will not necessarily price it fully until it happens. And we’ll see a pullback in equities when it happens, certainly in areas like tech. So we’re already seeing Netflix and other tech firms being punished because they’re an expansionary play, as you have say, rate rising and the balance sheet falling. Tech tends to fall as money is tighter.
CNA: Even if we see that half point rate hike each meeting from May, June, July, what’s it going to do to tamp down inflation, given how it is a supply side issue, not so much demand problem now.
TN: Right. What they’re trying to do is destroy demand. So in the early days of inflation, in 2021, it really was because of expansionary monetary policy and all the money that was dumped into economies as it went on. We saw supply chain issues get more complicated. And what we have now is really a supply driven inflation. You just can’t get enough out to markets. Really, the only thing the Fed can do is to try to kill demand and destroy demand. This is why they’re rising so fast, where people see things out of touch so they can’t borrow money to buy that house. They can’t borrow money to buy that car or whatever, because interest rates are rising too fast. That’s how they’ll destroy demand. That’s how they’ll create balance in the market where supply is constrained, particularly out of China. And demand right now is really too high for the supply that we have.
CNA: Okay. With regards to earnings news, you mentioned tech is in trouble, especially with the Netflix sell off. But we also see how Tesla and the Airlines seem to be posting upbeat guidance. How do you think the value lies for the rest of the year, as it’s very difficult now to find a company that hasn’t mentioned rising cost pressures or inflation in their guidance.
TN: Sure. Yeah. Rising costs are hitting everybody, right? And so what people will be looking for is those sectors that they believe can continue to gain value even as, say, consumption goes by the wayside, say, tech consumption, that sort of thing, or as say, the work from home thing, subside with Netflix, those sorts of plays. So continued value, even with rising costs. So who can pass costs on to their subscribers or their customers. So you’re looking at guys like consumer staples, you’re looking at finance. Those sorts of sectors will probably do well. We do expect China generally to do well once Shanghai and the other cities in China open. And once stimulus really starts, we believe that when stimulus in China starts, there will be a deluge of stimulus across China because they have to make things look good in time for that. Q four meeting.
CNA: Do you think that might change soon enough, though, because it looks like it’s unlikely to shift from a zero Covid policy. So we might see that stop start for later parts of the year?
TN: We might. I’m not thinking that they will. I think once they get through this, they’re realizing the pain that they’re causing their own economy, but they’re realizing also the pain that they’re causing the rest of the world. So I think they’ll get through this. They’re gradually open. And once they do open, they’ll likely stay open because the rest of the world is pretty much committed to Covid being endemic and China is really kind of slow to adopt it. Once they adopt it, then the world economy should be humming again, but it’s going to take some time to get back on track.
CNA: All eyes on the Asian giant, Tony, thank you for sharing your announcement with us, Tony Nash of complete intelligence.