Economic Strength... High Rates?

Michael Rudd, CFA | President, CEO & Portfolio Manager

This week, we note anecdotal commentary from several different companies and Federal Open Market Committee (FOMC) members. We concluded that inflation has remained stubbornly high while the global economy remains strong. While the FOMC paused its rate increases at the last meeting, it guided that there would be more rate increases to come. Indeed, we have seen commentary from several Fed governors that this positioning remains the case:

  • “Core inflation is not coming down like I thought it would. Inflation is just not moving and that’s going to require, probably, some more tightening to try to get that going down” – Federal Reserve Gov Christopher Waller
  • “…we’re still talking about, I mean, what is as strong a labor market as we’ve seen in, you know, a half-century here in the United States. So overall unemployment of 3.7% is three-tenths higher than it was measured to be at the last—a month ago but still it’s extraordinarily low. And so it’s a very, very tight labor market” – Federal Reserve Chair Jerome Powell

Furthermore, there is commentary from company management that business and pricing remain robust:

  • “People tend to focus a lot on U.S. consumer. But obviously, we’re a global business, and our developing market consumers have been incredibly resilient. And so just — I’ll give you one example, Africa, which I already mentioned, …Brazil, the same type of thing with lots of things happening in Brazil and Mexico. Our business continues to be very, very positive, and we posted great results in our developing markets for several years in a row now.” – Kellogg (K) CEO Steve Cahillane
  • “So we are seeing demand. It’s still robust. We’re seeing great demand for our vehicles, especially our new vehicles that we have in the marketplace. So that’s been strong.” – Ford Motor (F) CFO John Lawler
  • “The other thing we’re seeing is pricing has held up pretty well through Q2. I think there’s still the potential as we go through the year that we could see some price coming off in the second half. But so far this year, through the second quarter, it’s remained relatively robust” – Ford Motor (F) CFO John Lawler

“This means that” economies and inflation remain strong. In the last week, the ECB, Switzerland, Norway, BOE and Turkey have all raised rates. According to the Fed Futures market and the commentary above, we expect the US will most likely do the same at its next meeting. In our opinion, the battle against inflation is ongoing and the subsequent potential soft landing is still a big question. We will remain laser focused on the data and will adjust our views and portfolios.

Pathfinder Asset Management Ltd. | Equally Invested™
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Sources: Pathfinder Asset Management Limited

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