摩根士丹利：CPI若超预期将给美联储带来问题

Jim Caron of Morgan Stanley writing reduced communication by the Fed could result in more volatility. These changes may have valuation implications despite healthy earnings and broader market participation. Jim joins us now for more. Jim, great to see you. Thank you so much for being with us. How important is Wednesday's data? I I think it's critical. The reason is is that this will be the hurdle that probably makes the decision whether or not the Fed moves in September.

I mean, clearly, the jobs data has been weak. But if you get a hot CPI number that comes out, that's gonna create some problems. I mean, for right now, I think you can reduce the odds of a Fed rate hike in in in September. But, you know, core CPI coming in somewhere around 2.5, 2.4% consensus, then I think September is not gonna be a meeting that's really a live meeting where the Fed will make any action. But if it does come out hotter than that and it shows that there are some lingering effects and that it's necessary for the Fed to hike to contain that, then that can really, you know, create some uncertainty in the market.

How much does it really matter? I mean, at a certain point, we've seen stocks continue to gain despite some of the volatility or at least the increase of longer term yields, and we've seen overall market volatility actually not materially go up. So how much do, fate, rate Fed rate moves really matter for equity space for potentially other risk assets? Yeah. That's, you know, that's a great question because, like, what's driving higher equity prices right now is that we have higher nominal growth.

Higher nominal growth drives higher earnings, and we're seeing that in the first quarter and second quarter. So let's look at nominal growth in the first quarter. Nominal growth in the first quarter of this year was around 6.1%. Normally, in the past several years, nominal growth had been somewhere around, four, right, in in the lower nominal growth period. Now second quarter GDP comes out, and nominal growth, if you look at the GDP deflator, is 7.9%.

If you use core PCE as your inflation metric, then nominal growth is somewhere around point 5%. It's very strong. No matter what metric you're looking at, it's very strong. So that drives earnings, that drives valuations, that drives equity prices higher. If the Fed hikes rates 25 basis points in the midst of all this, is that gonna derail the higher nominal growth and higher earnings that equities are seeing? Not at all.

The what the the move in with with the Fed is more of a bond market event than it is an equity market event, and I think that's what we should be really focusing on. But isn't this all because of AI? I mean, you have this John Arthur's piece this morning talking about this Columbia professor who argues that without AI and the data center build out, The US would be in recession. Where are other parts of the economy growing?

Yeah. Look. I mean, anytime there's an expansion, you can single out one sector that's doing way better than others. Is that abnormal? No. And by the way, the markets have broadened. Right? So it's not just about AI in, you know, in in growth sectors and and things like that. And, yes, the AI build out does feed into a broader economy. But also remember that we have, you know, tax policy. We've got deregulation that's going through.

A lot of this stuff is broadening the economy. And and the remanufacturing bringing back manufacturing in in industry into The US. For every one manufacturing job you create, you create six service sector jobs on on the back of that. So the unemployment rate's relatively low. I know that some of that is based on demographics and and a lower participation rate, but, you know, there are many other metrics. Look at the, NFIB, the small business surveys, you know, where where you're seeing a lot of strength in job hiring that's going on there.

So, you know, I I really push back pretty hard on the argument that it's just about the data center build out. Yeah. Of of of yeah. That that's a very big part of that. But in every cycle, there's one dominant theme. On top of that, Jim, how much is it real growth versus inflation just showing up in the deflator? Yeah. You know, that no. That's exactly right. So so when when we look at when we look at nominal growth, you're including the inflation component of that.

Right? So it's not real growth. Real GDP is somewhere around, like, 2% or or or somewhere in there, and that's and that's right about at potential or above potential. But the thing is is that we live in a nominal world. We get paid in nominal dollars, equities get, you know, nominal earnings, and that's gonna still boost the prices higher. Right? So it it it is true that it's not real growth, but from an index level and from a from from the perspective of what do you think of the equity markets and can and can they move higher, then yes, you know, with higher nominal GDP.

Clearly, if inflation's too high, then it starts to peel back valuations and it lowers multiples and things like that. We're not seeing that at at this point. Right? We're we're in a sweet spot for equities with higher nominal growth where valuations tend to stay, you know, relatively high. In this kind of environment, Jim, is a sixty forty dead? So I I've been I've been highlighting this for a while. Sixty forty is not my favorite allocation for many reasons.

The dominant reason is the 40. It's not the 60. The 40% in fixed income, if you look at fixed income returns, if you just look at The US ag, it's zero for the past five years. Right? It's actually slightly negative. If you look over the past three years, it's, like, barely above zero in in terms of positive territory. So what's happening with bonds is that as yields have started to rise and the the correlations between bond returns and equity returns is very high, which means that your bonds are not hedging your equities as well as as they used to.

It also means that the contribution to return from fixed income is is really, really low. So not only are you not getting a great hedge against your equities with with fixed income, but you're also not getting a great return. That doesn't mean that you shouldn't invest in fixed income. You should, but you have to do it in a very tactical active manner. Passive investing in fixed income is what's hurting you. But if you're active and you're very selective about your fixed income, that can be the greatest source of alpha driving alpha in your portfolio, and that's something that we focus on.

So sixty forty is not the magic, ratio for me. Jim, thank you so much for being with us. Jim Caron of Morgan Stanley. Have a wonderful rest of the week. Right now, let's get you an update on stories elsewhere this morning.