Franklin Templeton Fixed Income CIO Sonal Desai joins Yahoo Finance Live to discuss two potential catalysts for markets, inflation data and midterm elections, as well as the outlook for Fed policy.

Video Transcript

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AKIKO FUJITA: Well, for a broader look at the markets, let's get to Sonal Desai, Franklin Templeton fixed income chief investment officer. Good to talk to you on this Monday. There's a lot of catalysts that we're watching as we kick off a new week. Obviously, Ines was talking about potential developments in China, although that's kind of down the line. We've got the midterms on tap tomorrow, and then of course the all-important inflation print coming later this week. What's on your radar?

SONAL DESAI: Honestly, the CPI. That's what's on my radar the most because the midterms, of course, are very important. But at this point, there seems to be broad agreement that there will be some form of divided government. Now, the question is whether we're talking about-- and as soon as it's divided, it means that policy, how many changes you get, are more restricted. And markets tend to like that rather than dislike it.

On inflation though, which is far more interesting, I think headline will come down a bit on the margin. We'll probably get ourselves down to below 8% on this read. The problem is going to be that, in month over month terms, I think we're still going to see fairly strong core CPI. And I don't think that a combination like that, together with the relatively strong jobs numbers we got on Friday, it's not going to give the Fed much comfort in terms of changing the path which was outlined by Chairman Powell last week.

AKIKO FUJITA: Yeah, I mean, Sonal, on that point, we're coming off of a week where we saw a pretty brutal selloff on the back of the Fed's decision but also the Fed chair's comments. And you've said that this kind of reinforced a longstanding view that you've had that you think rates are going to go higher than what's anticipated. How far is that runway, or how far does that runway look?

SONAL DESAI: So to me, it's more than how high they'll go. I think we could get to 525, 550. But I think the issue really is how long will they stay there because the market continues to hope and expect Fed rate cuts already next year. And I think that might be premature because our expectations are for core CPI, actually, to be pretty sticky through Q1 certainly, but enough that the Fed is unlikely to be ready to jumpstart a cutting cycle. And I think that's where markets still need to get to the point of accepting that outlook.