Fed’s rate hike success is dependent on ‘collateral damage’ in job markets: Analyst

eToro USA investment analyst Callie Cox joins Yahoo Finance Live to discuss the Fed’s recent rate hike and what it takes for it to have a meaningful impact on the US economy.

video transcript

DAVE BRIGGS: Well, to learn more about the markets, let’s bring in eToro USA investment analyst Callie Cox. Nice to see you. We’re going to talk about the Fed. We’re going to talk about bond yields. Let’s start with the 30,000ft view of FedEx earnings coming out early. Given what we’ve seen in the pre-release, what does it tell you about macroeconomics? It was Raj Subramaniam, their new CEO, who said that we mirror everyone else’s business. So what does it tell you?

CALLIE COX: Man, he took the words right out of my mouth. I mean I’ll tell you. It reflects how difficult the operating environment is right now, especially for companies that operate so globally. And of course, FedEx is exposed to global trade and shipments. I mean, that’s one of the biggest concerns for us right now.

And we’re generally an optimistic research team, but the fact that the rates are so high, the costs are so high, and there are so many changing parts just isn’t an easy environment for any company, let alone some of the smaller, more speculative ones Companies that have been favored in the last year or so.

SEANA SMITH: So, Callie, what does this mean for the next few months? I’m guessing how big do you think the slowdown will be and how will that be reflected in stocks?

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CALLIE COX: Yes, that’s a tough question because I think the extent of the slowdown is something everyone is questioning. I mean right now we don’t see it so much that we’re going into a severe recession. But honestly, with what Jay Powell said yesterday and how hard they have to hit that hammer to bring inflation down, I think we could be seeing a bigger slowdown than we thought.

It really depends on A how high rates go from here, B how quickly the Fed can bring inflation under control, and C how much collateral damage we need to see in the labor market. But right now, those are the three things we’re watching. And frankly, that’s in line with what we expect to see in the upcoming markets.

RACHELLE AKUFFO: And you called this a battle hardened market with a lot of negative sentiment. Do you expect that to change, or maybe it’s too negative? Are you pricing the risks correctly now?

CALLIE COX: Well, the mood is extremely negative. I mean, if you look at the AAII numbers that came out today, we’ve seen about the 4th or 5th bearish reading in decades or so. I mean, both private and institutional investors, while some hold onto it, they’re still incredibly scared of the environment. And frankly, this is a battle-hardened market. We’ve seen all the headlines this market has been through this year. So in our eyes, that’s a great thing. It doesn’t necessarily stop us from dealing with the slowdown that Seana mentioned.

But at the same time, it keeps investors a little in check. It keeps investors safe. They may be more on the sidelines than taking risks in these markets. And that puts a bottom on the stock market. That means when we see headlines that are better than expected – and the bar is low right now, by the way. If we see better than expected headlines, we could see investors rush in and see these quick recovery rallies as a result.

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DAVE BRIGGS: And on the bond yields that Rachelle mentioned all the way up, particularly the two-year highs of 2007, what tells you about the pain to come?

CALLIE COX: Well, that’s a psychological thing. And I think about it a lot. I mean, the fact that short term interest rates are so high right now makes it really difficult to decide if you want to invest for the long term, the duration, if you will, invest for the long term, or these rates take on the short term. I mean, we’ve had short term interest rates so low for so long that it was almost natural for people to take their risk over the curve and put their money out there and take that risk, the TINA trade.

But now it’s not so obvious anymore. And we’re also seeing rising interest rates on savings accounts. I mean, we get a lot of questions from our customers just about the balance between stocks and cash and how to actually make a decent interest rate on cash right now.

SEANA SMITH: Callie, do you see interest rates rising, do you see this trend slowing down anytime soon?

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CALLIE COX: Well, the 10-year growth, 3.5%, that really shocked me. That seemed like a pretty strong technical level. So from here I think it’s really hard to tell. I think it will depend on the pace of the Fed and exactly where they stop raising rates.

RACHELLE AKUFFO: And I want to ask you. Obviously we have the strong dollar. Some of these economic headwinds come from Europe. How does that fit into this stew of what we’re looking at and how might it affect US markets?

CALLIE COX: Yes, well, it’s easy [INAUDIBLE] what the Fed is trying to do here because of course the dollar is going to strengthen while the Fed is going up and the US is on the growth path that it is on right now. And that, unfortunately, has the consequence that the euro and with it European growth are being crushed. It is almost effectively exporting our inflation to Europe.

And as I mentioned at the beginning of the conference call, I think the world economy is just so connected these days. So you really have to keep an eye on currencies here because we have a lot of companies with overseas markets and a lot of European exposure. So what we’re telling our clients is to really understand what they’re investing in and know that even if they’re US investors, they probably have some kind of European exposure there and should keep an eye on the dollar.

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