Sels says he is in the "soft landing camp," expecting three rate cuts this year. He believes inflation has made "enough progress" to give the central bank confidence to start easing rates despite the markets' "slightly lower probability" of such moves.
Sels notes that slightly sticky inflation persists because "activity is quite strong," as evidenced by the equity markets moving higher. He observes that there has been a global uptick in goods demand with low inventories, leading to increased production and lifting GDP — a dynamic that "excites the equity market." He notes the Fed does not necessarily need to hit a 2% target to begin cutting rates as soon as June, but needs only to get close enough.
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Editor's note: This article was written by Angel Smith
Video Transcript
- Stocks are muted to start this busy week on Wall Street. We're getting lots of economic news this week. And strong data is causing investors to sort of pare back their rate cut expectations at the moment. That's why we're seeing mixed movement across the major industry indices there. But more traders are now expecting just one or two rate cuts this year. That is below the Fed's median forecast of three quarter basis point cuts.
Expectations for CPI coming up on Wednesday indicate that prices are expected to remain sticky. So the big question, are three rate cuts still on the table? Joining us to discuss, we have Willem Sels, HSBC Global Private Banking and Wealth Management Chief Investment Officer. Willem, thank you for being here. I want to start on getting your reaction to something that Jamie Dimon said in his letter, that the market sees a 70% to 80% chance of a soft landing. Jamie Dimon saying he sees much lower than that. What percentage would you put on the chances of a soft landing here?
WILLEM SELS: We are in the soft landing camp. And we're also in the camp of three rate cuts. We think that we've seen enough progress on a number of elements within the inflation basket for the central banks around the world actually, not just in the US, to have the confidence that with the-- with a tight interest rate-- with the higher interest rates, they can-- they can start to ease those.
Remember, that we now have a real rate which is quite restrictive still so they can start. We think that it will be the ECB, the Fed, and the Bank of England all joining in June but probably with the ECB having the highest probability. The markets now assigning slightly lower probability to the Fed. Doing that, we will stick with three rate cuts for the Fed as well.
- Willem, if we don't see, though, those three rate cuts, can markets still trend higher?
WILLEM SELS: Well, the equity market, obviously, is taking the positive other side of the coin as well. Why do we have that somewhat more sticky inflation? It's because activity is quite strong. You're seeing actually from a global perspective an uptick in PMI indicators. And what is new is that you're starting to see some upticks in goods demand as well, especially since inventories are also low.
So in a lot of the PMIs, we have seen that gap between goods demand minus inventories widening. And obviously, if you have demand but you don't have the inventories, you have to produce more. That is going to lift GDP. And therefore, that obviously excites the equity market.
- Well, let's talk about that lift to the GDP then because a lot of the notes have been calling this a period of non-inflationary growth that will kind of fuel earnings without pushing the Fed to be too hawkish. Do you buy that narrative?
WILLEM SELS: Well, if you look at the central banks' narrative, all three central banks that I mentioned, the Fed, the ECB, and the Bank of England, all had that implicit tone or even explicit in some cases that even though inflation will be a little bit stickier and may take longer to come down, there's enough of the elements within the inflationary basket that come down for them to have confidence that they get towards their target.
Remember, they don't have to be at 2% before cutting interest rates. They just have to have enough confidence that we will get there. With that real yield that is still quite a bit above the inflation, you are going to have the impact on inflation and make that come down. So that's why we think they will act in June.
- Willem, what do you think will be-- will give them that confidence in order, though, to cut in June? What is that key thing that they're looking for just in terms of a critical level or some sort of continuation of the downward trend that we've seen in inflation to convince them that, hey, it's OK to cut at this time?
WILLEM SELS: Well, to a very large extent, it is the labor market, right? It has always been about the labor market because first, goods price inflation fell, then services inflation continued to be quite sticky. So in the US in particular, they look at rent because that's a big part of the CPI basket that has eased a little bit.
The other thing is the labor market where you're starting to see the gap between supply and demand in the labor market shrinking. And Powell has also pointed to the fact that there is increased labor supply in part coming from immigration, in part also coming from a higher participation rate.
So we're still in that sweet spot, I do think, where you have indeed that combination of relatively resilient economic growth, good earnings, as well as, that prospect of rate cuts. Even if it is delayed by one month, which we don't think it will be, that's not the end of the world for the equity markets as long as those earnings continue to come in as we expect.
- So I'm curious about what sectors and names specifically you see having and being poised for more growth because we're seeing that a lot of the interest-rate sensitive sectors are the ones that are in leadership positions right now. So does that change this earnings cycle for you and does that change the names that you foresee having more of the outstanding growth this earnings cycle?
WILLEM SELS: So certainly, up to the first month or so of the year until mid-February, the leadership was with the interest-rate sensitive sectors. What you've started to see since the middle of February is kind of a more of a matching between value and growth stocks and even maybe value stocks increasing a little bit in that in terms of performance. And that's in line with our strategy to broaden out the sector exposure.
We continue to like IT because of the structural support and the innovation that is going to come from AI. But that's going to broaden out into other sectors. So when you look at earnings growth and earnings momentum where analysts are upgrading earnings expectations, it's not just in IT. But it's in communications as well. It's in industrials and it's in financials.
And we very much overweight those sectors because we do think it's becoming-- going to become more difficult to get a lift from price earnings ratios. So from valuations, it needs to come from earnings. That's why we focus on those four sectors where you see that earnings growth.
- All right. Willem Sels, always great to have you. Thanks so much for joining us here this morning. We have HSBC Global Private Banking and Wealth Management Chief Investment Officer.