As economy reverses, expect 3 rate cuts this year: Strategist

Several Federal Reserve leaders offered commentary this week, suggesting that the central bank will remain patient before cutting interest rates. The debate as to when the Fed will cut rates continues, as some analysts believe the Fed will push back rate cuts.

Morgan Stanley Wealth Management Managing Director Dan Skelly joins Market Domination to give insight into the state of the economy and why he believes the Fed will cut interest rates multiple times by the end of the year.

Skelly explains that his economics team has identified notable surprises in the first couple of months of the year which may reverse in the coming months: "Namely, shelters and rents we think might be on more of a disinflation path in the second half. We continue to see widespread penetration of immigrant labor, which is happening at lower wage clips on average. We think the slowdown in wages that we've seen somewhat may continue, and then just lastly, goods, seemingly continued to disinflate with China exporting deflation with all the excess capacity going on there. So, look, I think there's some reasons to believe some of these surprises may reverse. Our official call at the moment is for still three cuts starting in September of this year. "

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

Moving on stocks mixed today with the Dow on track for another day of gains here.

The headline for the economy is consumer sentiment.

We know the preliminary report from this morning coming in much lower than economists had anticipated for more.

Let's bring in Dan S Kelly managing director at Morgan Stanley Wealth Management, Dan, it is good to see you.

So I got some more green on the screen today.

Jet the Dow here on track for its eighth winning session in a row.

Dan, what do you make of this market?

And, and where do you think we go from here?

Sure.

And thanks so much for having me on this afternoon.

So what we would say is the sell off that we saw since uh late March uh was really more of an adjustment selloff, right?

And you saw frankly a lot of the same leaders heading into the the peak in March uh outperform during the sell off, be it technology or energy or some of the others.

And you actually saw um some of the traditional and more yield oriented sectors continue to lag.

So again, this informed us that it wasn't so much a growth scare.

It was more of an adjustment in the markets where the market, obviously, as everyone has talked about all week continued to price out, um, aggressive fed cuts, um, aggressive fed cuts, but that's not what we're hearing from the fed, right?

You know, you had a couple of other fed uh speakers today who seem to indicate they're gonna be quite patient.

Do we believe that?

So, listen, I would say there has been in our economics team led by Ellen Zenner has highlighted there has been some notable surprises in the first couple of months of this year that we could actually see reversed in the next couple of months.

So namely shelters and rents, we think might be on more of a disinflation path in the second half.

Uh We continue to see widespread uh penetration of immigrant labor which is happening at lower wages on average.

So we think the slowdown in wages that we've seen somewhat may continue.

Uh and then just lastly good uh seemingly continue to disinflate with China exporting um deflation with all the excess capacity going on there.

So look, I think there's some reasons to believe some of these surprises may reverse.

Our official call at the moment is for still three cuts starting in September of this year.

Dan, I'm interested as you look ahead here.

What do you think the next catalyst is for this market?

Some are are already looking ahead to NVIDIA earnings what do you think?

How important is that print for the market?

So that's an excellent question.

And I would argue a lot of the pup if you will for NVIDIA has already been revealed because we just heard from all the big hyper scalar tech platforms over the last two weeks increased their capital spending.

So the likelihood that NVIDIA is gonna at least meet if not, maybe even again, exceed expectations has been rising.

As all the big tech players are saying, hey, we're spending more on these themes.

Where else is that playing out?

Uh very kind of uh uh nuanced in some of the power plays.

You've seen utility nuclear and gas plays start to see bi big earnings revisions because all of the big tech platforms are spending on data center infrastructure.

This is all coalescing around the same theme you mentioned, which is Nvidia's leadership and A A I. Yeah, I would say it's certainly a catalyst but more to the point we want to see overall earnings achievable.

And as we've now printed, 90% of S and P market cap weighted, the reality is we're on track for mid to high single digit earnings growth this year, which is kind of a slow grinding catalyst.

But one that we think is a little more than amid all this uncertainty.

Um And when you're looking at where to deploy right now, would you rather play something like NVIDIA directly?

Or are you looking at that sort of a I adjacent ecosystem.

Yeah, another excellent question and, and look even looking at the 1st 4.5 months of this year, the magnificent seven from last year has narrowed into the Fab four.

And you're not seeing all of the same monolithic performance that you saw 18 months ago.

So we've had exposure to NVIDIA, we continue to in the portfolio.

Um But to your point, we are seeing this tremendous opportunity across other idiosyncratic uh ecosystem and infrastructure plays like power uh and potentially gas.

We're seeing that also just in what we call the Fortune 100 the companies that are well capitalized quality names frankly across uh a host of industries, whether it be manufacturers, healthcare, financials.

And to your question, this is where you're truly starting to see some players starting to kind of gradually adopt A I and starting to see some improvement in their earnings.

Now.

It hasn't been widespread just yet, but this is almost acting like a put option on the rest of the market because I think the general consensus is that more often than not A I adoption is gonna lead to better earnings power Dan next week.

You know, we're gonna hear from some, some retailers.

I wanna get you out here on this, including the world's largest retailer Walmart, a bellwether for the consumer.

What is your general take there, Dan on the consumer right now?

You know, healthy resilient or or showing some signs of cracks.

Yeah, I don't mean to punt on the question, but it's a mixed bag and it's really a reflection of this phenomenon of a two track economy where interest rates have really become the dividing line between the haves and the have nots.

This is playing out across frankly the corporate sector in terms of large versus small cap uh co companies that are strong balance sheet, net cash and strong free cash flow versus unprofitable.

And to your point, this is playing out very cute in the consumer sector.

And we've heard about uh this kind of again, bifurcation among consumer spending trends in the last three weeks via earnings season in a way.

Frankly, I have been seen as acute in years.

And so if you just look at a handful of examples, whether it be uh restaurant spending and more rotation to food at home, whether it be the divergence between corporate travel with some ex expectations of fed cuts.

As we talked about the potential M and A and deal flow versus domestic vacation spend, which was a completely kind of reopening revenge travel.

Uh tailwind a couple of years ago, you're seeing this bifurcation in terms of the high end, the well capitalized companies and everyone else.

And the question has always been, everyone's trying to figure out is it a hard landing or a soft landing?

The way I'm looking at it is more so in terms of this being an unknown flight path coming out of this pandemic with historic uh inflation and then uh aggressive fed tightening.

I don't think there is gonna be playbook for this.

But the one thing that we continue to look at is whether or not the one track can continue to hold up the overall averages.

And I think there's some meaningful evidence that the second track is starting to drag things down overall pretty meaningfully.

So this is something we continue to uh monitor closely.

Dan S. Kelly.

Thanks so much.

Happy Friday.