The US economy is flashing some serious warning signs this morning.
We saw producer prices, or wholesale inflation come in at its highest since 2022.
Now CPI hit 3.8% and real wages are falling for the first time since 2023 at a time as Americans get squeezed at the gas pump as well as the grocery store.
At the same time, the historic.
The rally came under pressure yesterday, but we are looking at some of those losses recovering today.
We just saw weakness in high flying chip stocks like Intel and Micron as traders took profits ahead of high stakes in US and China trade talks.
Well joining us to break down some of the macroeconomic cracks that we're seeing as well as to weigh in on what we're seeing across the equity market is Paisley Nardini, Managing Director, Head of Multi-asset Solutions at Simplify Asset Management.
Paisley great to have you here.
Thank you so much for joining us while we are looking at some hotter than expected inflation figures and traders are renewing their bets on US Treasury as well as pricing and potential rate hikes.
But what do you make of the latest figures for inflation?
Well, good morning.
Thanks for having me.
I'm a little bit surprised, but then again, I was yesterday with a CPI report as well.
And when I say surprised, we haven't really seen too much backup in Treasury yields.
And typically when we would expect or see this type of hot inflation print.
A yields would react and what I think this might be telling markets is that a lot of this is already baked in or it's priced in from a yield perspective, which kind of brings me back to perhaps it's time to start thinking about adding duration.
I would say at a minimum though, we definitely have seen a lot of volatility in the bond market, and today's inflation print just puts further pressure on the Fed, and we have a new Fed chair coming in as well.
So a lot, a lot of noise and a lot of confusion right now.
A lot of uncertainty as well, given some of the headlines that are coming in, but the market has been incredibly focused on Brazilian corporate earnings, and if we do look under the hood, credit card as well as auto loan delinquencies are hitting record highs as well.
Are markets looking past some of these cracks in the consumer economy, especially ahead of retail sales tomorrow, and how long can strong corporate earnings actually mask the pain of what the everyday American consumer is going through right now?
Yeah, just further adding to this confusion, as you mentioned, 1st quarter earnings were quite resilient.
We saw equity markets rebound off the lows in March on the back of the Middle East tensions, but I would say the earnings that we saw from 1st quarter, they were a snapshot that's backward looking.
To your point.
Equity markets are always forward looking in nature and just based on the price movement over the last several weeks, they are really looking through this noise and I think it's difficult to think about inflation heating up, markets remaining resilient.
One of these is going to have to slow down.
And so as we look forward over the next couple of months, I think it will continue to be choppy.
I think markets need to remember though that we do not have the same support through easing monetary policy from the Fed that we've really relied on over the last few years.
This terminology of the Fed put, they can save us if we need to support the markets.
Ultimately what we've seen though is the Fed is between a rock and a hard place with inflation prints in the last two days coming out.
Really hot.
Uh, the Fed's going to have to be in a wait and see perspective, and I'm glad you mentioned retail sales because that's coming out tomorrow, and I think that will be really insightful because all of this pressure at the pump and food prices is going to have to trickle down to the consumer, and the consumer has been very resilient.
Um, some of the tax refunds from the one Big Beautiful bill helped to support that, um, but I think we might start to get caught up here and start to see maybe some small cracks in the system.
Paisley, by this time tomorrow we will have the latest retail sales numbers, so we'll see the reaction in terms of the broader market as well as yields by tomorrow morning.
So I do want to zoom in on the tech sector.
Yesterday. semiconductor index suffered one of its worst intraday drops in over a year, but in New York morning trade, we are looking at the Nasdaq Composite trying to eke out a gains.
So when it comes to the AI trade, what is your take?
Do you think we have more room to run here?
The short answer is it's, I would say yes, we do have more room to run in the tech sector and AI theme more broadly.
I do think we are starting to see a bit of a trickle down effect in the ability of mid and small cap companies to utilize AI to become more efficient, increase their bottom lines, increase their margin.
Um, but any way you slice it or any way you cut it, uh, AI continues to lead from an earnings perspective and from a margin perspective at the corporate level.
Um, I think there's ways to move beyond that from a diversification perspective within a portfolio, uh, but I would not be, uh, selling all of my tech or AI exposure at this point in time because it's shown a lot of resiliency and fundamental strength underpinning these companies.
Paisley, while I have you here, I do want to address the elephant in the room.
We are still dealing with major global instability, and there are a lot of expectations as President Trump and Xi Jinping meet in Beijing.
But how should markets be pricing and geopolitical as well as political risk right now?
So from an asset allocator perspective, I think it's really challenging to look at equities which are very concentrated, slightly lofty valuations and thinking about some of the consumer effects from higher inflation, and then you look at bonds and it's really been an anti.
Bond or anti-duration trade for the last few years and so a common theme that we are starting to see is the introduction of hard or tangible assets to help diversify portfolios and these are whether it's energy, commodities broadly, infrastructure themes from reshoring.
Um, AI electrification could go on and on, but ultimately as we think about ways to improve the resiliency of a portfolio beyond just stocks and bonds, I think hard assets and alternatives, um, are one of the, the best tools that an allocator can use in their portfolio today.
Yeah and I'm glad you mentioned that word diversification.
So what should the investors be looking out right now, especially given the broader uncertainty and you mentioned commodities that we have been seeing plenty of volatility this year.
So as we had beyond 2026 and into 2027, what does that outlook look like right now?
Yeah, markets are shifting very quickly.
Last year and into early 2026, we were really focused on gold and silver and precious metals broadly.
That trade unwound pretty quickly.
Um, now we're talking about oil, energy, and gas.
And so I think what this leads us to believe or understand is markets are dynamic.
And they are shifting very quickly.
You need a strategy or an investment management, um, solution that's going to be able to adapt to that.
It needs to be flexible.
So we really believe in thinking about being long short, being flexible, utilizing active management within some of your alternatives.
I know sometimes active management gets a bad rap, especially with inequities, um, but just being flexible and being diversified through the end of this year, I think will be a good tool to have in the portfolio.
Paisley, if we take a step back and look at the year to date gains for the energy sector, we are looking at gains by nearly 28% outpacing IT as well as the other sectors.
So if we did not have a crystal ball, we would not have known this.
So Paisley, thank you so much for joining us.
Appreciate your time as always, as well as all of your insights.
Thank you.
