FULL VIDEO TRANSCRIPT BELOW:
J.D. Durkin: All right, let's get things kicked off here in our conversation with the latest pieces of economic data. No shortage of things to talk about here, my friend-- PCE to manufacturing, PMI. What this morning is catching your attention?
CHRIS VERSACE: So, I mean, I hate to say it, JD, but we have to pay attention to all of it. As we saw yesterday, Fed Chair Powell came out and said that it does look like the Fed might be taking softer steps. No clues on the terminal rate for where the Fed funds rate might actually wind up but he did say that the Fed is going to be watching the data.
That means we have to be watching the data. So what did we see? You know, the PCE price index, a key indicator by the Fed, came in a little softer than expected but still up big, as we can say, year over year.
But what really bothers me more so is what we saw in the ISM manufacturing data. And I say that because it rolled over into contraction territory on the headline number. New orders were again for the second month in a row in contraction territory. And we've shared with AAP members the tight correlation between S&P 500 revenue and the ISM manufacturing PMI data. And I'm afraid to say, JD, it confirms our view that we're likely to see expectations for 2023 come down despite what the Fed is doing.
J.D. DURKIN: Is there a difference between the reality of what the data says and perhaps how the markets and even the Fed may be reading it?
CHRIS VERSACE: Yeah, 100%. So if you're in the Fed, what are you looking for, right? You want to see slower job growth. You want to see inflation start to denote at the margins, come down and then hopefully come down even more so in the coming months.
But if you're the market, you're trying to understand, what is the outlook for revenue and earnings for the current quarter but really going into 2023? And that's why focusing on that S&P-- sorry, the ISM data is really critical here. It's a very, very tight correlation.
And we've been sharing with AAP members our concern about the outlook for 2023, whether it's the continued inflation, higher interest rates to fight it, slowing manufacturing and services economy, dollar headwinds, you name it. There's a number of reasons to be concerned. And I think that we're going to start to see more rate cuts-- sorry, more expectation cuts for 2023 in the coming days and weeks because of the economic data that we are getting today and then in the coming months.
J.D. DURKIN: And of course, we did hear, as you just alluded to there, Chairman Jay Powell speaking at Brookings Institute yesterday. Any other top takeaways for you. What that's feel like? That's always the go-to question, right, after a high profile press conference or something. Oh, what's your top takeaway? But it is an important one for context.
CHRIS VERSACE: Well, it is. I mean, so I guess there would be really two. One is that when you look at the CME Fed Watch tool that tracks expectations for the Fed funds rate, it really didn't move, right? So that tells us that the market was widely expecting what Powell had to say regarding December.
Remember, he indicated, ah, we could see smaller rate hikes. So again, not exactly bowling us over. I think what's key is what Powell did not say. He did not indicate where the Fed is likely to end raising the Fed funds rate, simply saying what he said before.
We have more work to do. We need to see inflation down on a sustained basis. And we're going to continue to do this until the job is done.
So I think that last part is far more important. There are some thoughts out there that we could see a rate cut in the back half of 2023. And I think Powell really squashed that idea.
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