Fed: Rents and wages remain 'sticky' components of inflation, strategist says

John Petrides, Tocqueville Asset Management portfolio manager, and Rob Haworth, U.S. Bank Wealth Management senior investment strategist, join Yahoo Finance Live to discuss the next moves by the Federal Reserve to tackle record inflation in the U.S.

Video transcript

- Here's the closing bell.

[BELL RINGING]

- And there you have it, you're closing bell for August the 8th. Let's check how stocks ended the day. All three major indices there just off slightly. You see the Dow there eking out some gains there. About 0.09%. The S&P 500 there and the NASDAQ down about a tenth of a percent there. So mixed results so far. Well, for more on the markets, let's bring in John Petrides, Tocqueville Asset Management portfolio manager, and Rob Haworth, US Bank wealth management senior investment strategist.

So as we break down some of this market action, obviously, John, we're seeing the strong jobs numbers on Friday. A different picture though on Monday. What are the markets trying to digest right now?

JOHN PETRIDES: Yeah. I think this is a great microcosm of the tug of war that we're seeing on the fears of either inflation or recession. If you are fearful of recession, well, I think Friday's numbers really turned that upside down with such a strong jobs number. And we woke up this morning to the market rallying on the fact that, OK, well, maybe if there's a recession, it's going to be pushed down the road or longer than what some may have thought.

But at the same time, that jobs number was very much inflationary. And we know we have the CPI data on Wednesday. So right around midday or so the market started setting its sights on Wednesday's CPI data. And you have an expectation of 8.7% is what economists are forecasting for that CPI data. But, listen, the jobs data and wage growth are definitely a very strong sign that inflation could be stickier than what many are foreseeing.

- Rob, what are you watching? Are you seeing signs that this bear market rally is just a little bit of a fizzle?

ROB HAWORTH: I think that's our primary concern because as we look at it, it's a matter of what is the Federal Reserve going to do? Inflation has been pretty rampant. We saw that, as John pointed out, in the jobs number on Friday. And the market is really still trying to decide how far is the Federal Reserve going to have to go to rein in inflation and bring this down.

And we even had speakers over the weekend talking about how much they're going to have to raise rates. So I think that creates a bit of a challenge for the market. And we're starting to see earnings expectations come down for full year 2022 and '23. And I think the next question is, how far does that have to go?

- Well, John, what do you think about earnings? Because reports really clearly showing that demand is there. Sales are holding up in the face of very high inflation. But of course, the question as we look out into the third and fourth quarters is how long that's going to be the case. What do you think?

JOHN PETRIDES: Yeah. Well, I think just reading through a lot of company earnings, the good news is that most companies that I'm listening to are talking about an opening of the supply chain, that we've gone through the worst of the supply chain lockup, which is a very good thing. And that's a general statement, of course. But we're making headway there. But I think many comments out of CEOs and CFOs still lack of visibility. There's a massive uncertainty in the tone, which forces companies to sit on their hands because they don't have much visibility in terms of what they could forecast in terms of their growth going forward.

Now, on the other hand, you had a very strong merger Monday today. You have a lot of companies, big cap companies-- CVS, Walmart, Amazon, and others, Pfizer-- companies out there that are announcing acquisitions. So I think that's a good sign as well. So I think that we're all sitting here in a cloud of uncertainty waiting for the data to come out. And I think that's where companies sit as well in order to forecast where sales and growth may come from or not come from over the next 12 months.

- And, Rob, I want to ask you about the New York Fed's monthly survey of consumer expectations. It actually saw the biggest drop ever in July. Most consumers expecting inflation to run about 6.2% over the next year and about 3.2% over the next three years. Now, a lot of that could be to do with seeing gas prices come down, people feeling a little bit better. But what is your view on what the consumer is looking at?

ROB HAWORTH: Well, yeah, I think the consumer is definitely keeping track of what's going on with those prices. And it is good news that we're seeing food and energy prices come down a little bit. I think the hard part for us is we're not yet really back to full supply capacity. We're seeing oil inventories at the lowest level since 2005. And so it's a question of what is it going to take if consumers are really going to be able to spend money here-- with higher wages, they certainly are-- what is it going to take to bring that market back? So I think it's helpful that we're seeing inflation expectations come down and become anchored. I think there's still a lot of questions about, what is that future path really going to be?

- John, also on the consumer, Fannie Mae release numbers showing consumer confidence in the housing market, it's lowest levels right now since 2011. We didn't see it in the jobs numbers. But is this the best evidence that perhaps the Fed is succeeding?

JOHN PETRIDES: Yeah. We're going to find out more so I think on Wednesday, and then even the September month that shows the August CPI. There are two components of inflation that are sticky. Rents and wages. And you could have headline variable what was once considered transitory come down, food, energy, housing slow.

Prices on used cars will come down. That's going to help. But the Fed is really focused on where wage data is and rents because that stuff is fairly sticky. So that's where they're going to focus in what could be really a headwind for them in trying to wrestle down inflation lower.

- Rob, when it comes to the legislation that we saw passed the Senate over the weekend, of course still working its way through Congress, but higher corporate taxes, tax credits for EVs, some change in terms of health care and what will and what will not, I guess just in terms of Medicare's negotiating power, what does this mean from an investor perspective? And how does the market do you think look at legislation like this?

ROB HAWORTH: Well, I think for the market, it's fairly modest. In the end, the bill has to pay for itself. It's supposed to reduce the deficit. So I think the total market impact is modest. We're certainly seeing some of the sectors really benefiting from the clean energy story here today. I think that's certainly constructive. And then we've got a bit of a headwind for earnings, where the minimum tax as well as the tax on buybacks are a bit of a headwind for corporate earnings. So it's a pretty mixed bag with probably small wins for some of the clean energy sorts of companies. But beyond that, it's modest in its size.

- And you can see that in the lack of volume and lack of market action today. John Petrides, Rob Haworth, good to see you both. Thank you.