A top economist at Morgan Stanley has warned it’s too early to take the slight cut in interest rates as a sign the economy has turned the corner, insisting it’s “far too early” to tell to celebrate.
On Wednesday, the government released the latest CPI report, which showed inflation hit 8.5 percent in July – down from 9.1 percent in June.
On a monthly basis, prices were flat from June to July – the smallest such increase in more than two years.
The last month’s relative decline from June was attributed to falling gas prices, but this was in part due to fewer Americans pumping or filling up less often.
Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, said it was “wronghead” to think the worst was over.
“The notion that inflation may have peaked may be correct in our humble opinion, but it could also be a bit of head-forging on this notion that the Fed, hey, game over, problem solved, the Fed has defeated the day, and the Fed’s credibility is back and all that,” she said on Bloomberg’s What Goes Up podcast on Friday.
Morgan Stanley Wealth Management chief investment officer Lisa Shalett spoke to the hosts of Bloomberg’s What Goes Up podcast on Thursday
She said “a lot of things have gone right” in terms of slowing global demand for energy and easing supply chain problems, which has helped bring down rising food costs.
“But for the markets to celebrate like they’ve been celebrating since mid-June, we think we’re way too early for that.”
She said she expected Fed Chair Jerome Powell to be pleased with Wednesday’s data and said June inflation of 9.1 percent appears to be a peak. But, she warned, inflation is still too high.
“If I’m Jerome Powell, I probably have a smile on my face and I’m glad energy prices have gone my way,” she said.
“But let’s be honest here, folks.
“I mean, 8.5 percent in your headline and a really flat core of almost 6 percent is far from a sustainable level. It’s triple your target of 2 percent.’
Federal Reserve Board Chairman Jerome Powell is seen July 27 in Washington DC
Falling gas prices (pictured) gave Americans a little respite from the pain of skyrocketing inflation last month, although the rise in headline prices slowed only slightly from the four-decade high it hit in June
A lack of affordable options is driving US home sales back. The fastest declines in new upcoming sales from May to June were in San Jose (-24.3%), Seattle (-23.9%) and Salt Lake City (-20.8%).
Shalett described the first six months of this year as a “very, very textbook bear market,” noting that some of the sharpest declines were felt in the technology sector.
“People think the dates are going to be more constructive, and we let people think they’re going to find some bargains, and they go in and find the bargains where things sell out the most,” she said.
“And some of the biggest damage, as we know, has been in the unprofitable tech space, in some meme stock areas, and in some of the core pieces of Nasdaq and Faang. And that fueled this hope that the worst is over.’
She added that there was more bad news to come.
“People who really study the market know that in every bear market we have these retracement rallies. They’re head fake rallies.’
US Treasury yields fell on Friday after a volatile week as investors assessed whether an apparent slowdown in rising inflation could slow the rate hikes by the Federal Reserve.
Data on Thursday showed US producer prices fell unexpectedly in July.
It came a day after the July CPI news.
The data has raised some hopes that the worst inflation spike may be in the rearview mirror. Still, many analysts and investors say more evidence is needed before determining how Fed policy might be affected.
“The theme here is that if the monthly inflation data is actually a bit more stable, then we need fewer rate hikes, and then long-term inflation probably won’t go down quite as much,” said Guy LeBas, chief fixed income strategist at Philadelphia-based Janney Montgomery Scott.
However, LeBas echoed Shalett in stressing that it was too early to celebrate.
“I would remain skeptical until we see at least one or two more inflation data that signals rate hikes are slowing,” LeBas said.
Low liquidity has also added to market volatility as many traders are away for the summer holidays and some investors are wary of taking positions until there is more clarity on the outlook.