Opening bell ahead of the market open here in New York, we are looking at US stock futures down sharply by about 0.5% point while we're looking at both WTI and Brett higher.
And of course we're continuing to monitor the situation in the Middle East and the global economy is shifting from a classic risk shock to a terms of trade shock.
The benign Goldilocks market regime.
Officially broken down now this week's central bank bonanza with a historic energy shock currently splitting emerging markets into clear winners and losers.
But of course all eyes are on Fed chair Jerome Powell later this afternoon and joining me ahead of the market open is Jeffrey Roach, Chief Economist at LPL Financial.
Good morning, Jeff.
Thank you so much for joining us.
Well, we have a lot to deal with this morning in terms of.
Headlines, but the Fed is set to make its rate decision later today and before the conflict with Iran began there was a lot of optimism about rate cuts, but now that we are seeing oil prices spike as well as inflation even before the conflict rise.
What do you expect to hear from the Fed not just in terms of the rate announcement but also economic projections.
Right.
There are a number of really important things to watch out for when they, uh, publish their statement later today.
In addition to the fact that, you know, they do their normal statement, we do not Policy today, but what we do expect is something interesting within their updated summary of economic projections.
It's been a little bit since we've seen a summary of economic projections, so I expect to see growth revised down and inflation revised up.
So in essence kind of reverting back to September's outlook rather than December's outlook.
Unfortunately with the conflict in.
At least a lot more uncertainty now.
I do expect rate cuts later in 2026 because we do see some likelihood that inflation will moderate.
It's not going to moderate anytime soon.
We have to be patient.
Perhaps by the time we hit late summer.
That's the timeframe we expect things to improve a little bit.
Yes, and Jeff, when we look at oil prices this morning, we are looking at WTI close to that 100 level again and Brent obviously topping that level, but we are keeping a close eye on the Strait of Hormuz and there are a lot of politics.
And geopolitics involved here.
So how closely are you monitoring the situation and what exactly do you think is the threshold where oil starts doing serious damage to the broader US economy as well as the global economy?
Right?
So I think there are two very, very different paths forward.
One is for the US and one is for the rest of the world.
You think about what our country has as it relates to our own supply of oil.
I think an oil shock, and we've actually already seen this in the way that capital markets have traded in Europe, particularly in Asia as well, Japan, that I think the path for the US is probably going to be less choppy than the rest of the world.
However, that said, I think what's really important for us as a domestic economy is to think, OK, what, what is that threshold number?
I think oil needs to stay closer to the 150, maybe even a little bit higher 150 mark.
Uh, this is WTI, uh, for a sustained period of time.
So there's two factors here.
There's magnitude and duration.
You know, is this a short spike that is over a short period of time?
That's very, very different than an extended longer duration of elevated prices.
If that is the case, certainly recession risks are going to rise, but we do not have that as our base case.
OK, two words that we've been hearing recently since the conflict began as stagflation as well as the R word recession.
But for the everyday investors out there watching right now, what is the most critical risk that they need to protect their portfolio against in the coming weeks and months?
Well, of course, when you think about investing, you think about protection, non-correlation.
If there's a true global shock that impacts the world, we often say correlations go to one, meaning that it's a really difficult place to hide, as it were.
But at this point, I don't think the correlations are going to go to one.
Look for diversification.
Clearly watch out for any change in the fact that we're, we're seeing.
The flight to quality in dollar assets now, that's a good thing for US investors.
We've seen the dollar strengthen against pretty much all currencies, even the euro.
Most global currencies, not, not all.
Interestingly enough, the Israeli currency has held its own against the dollar.
But if you see a flight to quality, that's a good thing, a little bit of the protection.
Uh, one, so look for that as a potential warning sign for that, that dreaded correlations going to one, and really it's, it's a more difficult time to, to look to diversification to protect portfolios.
And you mentioned the US currency and this week is a big week for global central banks, so we're keeping an eye on what comes out of the central banks.
But as you mentioned, the latest macro shocks have driven a sharp deterioration when it comes to the global growth outlook and expectations.
So do you expect the US currency to remain dominant.
Well, we, we think that the last several weeks has certainly added support to the view that the dollar is holding steady.
We actually think that there's going to be some really unusual movements even in our, in the, in the macro factors like growth, spending, inflation data now.
Remember, uh, we had PPI numbers come out this morning, very, very hot.
Some of those PPI line items flow directly into the Fed's preferred inflation metric, which is that PCE deflator, meaning that inflation is going to run hot.
But at the same time, we actually might see Q1 growth.
Rise above 2.7% quarter on quarter annualized.
That's because the government's reopening some of the unusual behaviors in in net exports.
But I, I do think though that the, the support on the dollar side, uh, the overall range boundedness.
Of the 10 year Treasury yield suggests that, you know, perhaps markets are right to look past this war that's going on, and we'll look for a resolution hopefully, you know, obviously sooner is better than later, but I think we'll we'll work through the temporary disruptions right now.
OK, Jeffrey, well, we will have to leave it there for now, but thank you so much for joining us and thank you so much for sharing all of your insights as well as your perspective.
Take care, Remy.
Thanks.
