Market strategist: We're gauging signs the Fed may no longer be ‘on autopilot'
Yahoo Finance Video
Goldman Sachs Asset Management Global Fixed Income Macro Strategist Gurpreet Gill joins Yahoo Finance Live to discuss December JOLTS report data, inflation, markets, the expectations for rate hikes, and the outlook for the Fed.
Video Transcript
[AUDIO LOGO]
BRAD SMITH: Also, today's comments from Fed Chair Jay Powell might already be priced into the market. But our next guest thinks it's worth looking at patterns for just how long the Fed expects to hold rates against inflation and whether that is priced into the markets. Joining us now is Gurpreet Gill, who is the global fixed income macro strategist over at Goldman Sachs Asset Management. Great to have you here with us this morning. OK, so take us into your thesis here and whether or not you believe that today's commentary from the Fed is already priced into the markets. And if not, then what would you be listening for?
GURPREET GILL: Hi. Well, first of all, thank you for having me on the show. Fed Day can potentially be quite an auspicious day for markets, depending on whether we get a hawkish outcome or not. In terms of what we're looking for today, it's really what signals we get from the policy playbook after today's meeting. So today, it's widely anticipated that the Fed will step down the pace further to 25 basis points in terms of their rate hiking path.
But we are going to be gauging whether there's any changes in the meeting statement language, particularly the phrasing which currently states or alludes to ongoing rate hikes. In some ways, that suggests that this hiking path is on autopilot. And so any adjustments there that indicate that that is going to move towards more of a meeting by meeting approach would give us confidence in our current outlook, which is for the Fed to only deliver one more 25 basis point rate hike after today and then pause thereafter for eight to 10 months.
And so there you have those Ps. So the pace is slowing. The peak is likely 4.75%, in our view. And the pause will be eight to 10 months. And the final P that markets are focused on is whether the Fed pivots towards easing. In our view, the inflation data isn't going to evolve in a way over the coming months that warrants easing. And so we think market pricing for easing later this year is somewhat misplaced. But at the same time, we are probably slightly more dovish in the near term in that we don't expect a rate hike after March, unlike current market implied pricing.
JULIE HYMAN: Gurpreet, at the same time, if the job data existed in a vacuum, wouldn't the Fed have to keep on going? I mean, how much of a problem-- we just got job openings at 11 million, rising again, right? We still have growth in the job market. How much of a problem is that for the Fed and for those like yourself who are thinking they're going to get more dovish?
GURPREET GILL: Well, there's a few things to unpick there. The first point is that the Fed has a dual mandate. So they are targeting both full employment and price stability. The second point is that healthy job growth is not concerning if it's not accompanied by an acceleration in wage growth that can cause issues for the inflation objective. And so if the labor market remains healthy but wage growth is decelerating, which is what we've encouragingly seen in measures like the Employment Cost Index for the fourth quarter, which was released yesterday-- that also happens to be the Fed's favored measure-- then that is not necessarily problematic.
And so what we are focused on is how much labor market rebalancing is needed to keep that trend intact of decelerating wage growth. And so we think the jobs workers gap, for example, needs to compress further to around 2 million to be consistent with wage growth of 3 and 1/2%, which is compatible with 2% inflation. We're not yet there. There's still further progress to be made. I wouldn't read too much into one month's job openings data. I think the Fed is going to be looking at this data set holistically.
And today, the task for Chair Powell is to balance the encouraging progress that we have seen without inducing any premature easing of financial conditions because he will also reiterate that the job is not yet done. In some ways, the deceleration we've seen in inflation is the easy part because it's come from goods and commodities. The path to 2% from here is where things are more difficult because you need that core services inflation to come down. And for that, you need wage growth to come down. And there's a lot of uncertainty around that.
BRIAN SOZZI: Is there something that the Fed chief could say in his press conference that might spook the markets?
GURPREET GILL: I think that's incredibly difficult to predict. I think we need to focus on the balance of how Chair Powell characterizes the progress on labor market rebalancing and what that signals from the past here on out. I think he will be very careful around his word choice on that. But I think big picture for investors, the focus is that we are past peak inflation. We're probably past peak policy hawkishness.
In 2023, market concerns have shifted from inflation fears to growth worries. And so for fixed income markets, we think this means that bonds will sort of reassert themselves as a hedge or a provider of balance in multiasset portfolios. It's why we titled our 2023 outlook Bring On Bonds. That balanced property improvements combined with higher income and total return actually sets the stage for quite an opportunistic year ahead for fixed income.
And it would be remiss of me not to mention January performance, given we're here on February 1. So fixed income and assets, more broadly, were off to a stellar start to the year. We saw US investment grade, for example, deliver a total return of 4%. That comes after a 15% decline last year. We also saw a very forceful rebound in areas like Asia credit. And both of those markets we actually see investment potential in.
JULIE HYMAN: And, Gurpreet, that's part of the reason, right, that goes toward explaining why we have seen rates falling at the same time that we have seen still a tightening from the Fed. So just to take the 10-year as an example, six months from now, where would you-- where would you forecast that yield?
GURPREET GILL: I wouldn't make a specific point forecast on any Treasury yields when we're making investment decisions in fixed income markets. We're really looking at what is priced in relative to our assessments. So right now, our bias in macro markets is to be slightly overweight US rates on a cross-market basis, because like I mentioned, we hold a slightly more near-term dovish view on Fed policy relative to the market. Whereas in markets like Europe and Japan, we are more hawkish than market implied pricing. And so we have a bias to be underweight there.
BRIAN SOZZI: All right, we'll leave it there. Gurpreet Gill, Global Fixed Income Macro Strategist at Goldman Sachs Asset Management, always good to see you. We'll talk to you soon.