Mitul Kotecha on the Markets (Radio)

cause inflation? And in my semi answer, and you tell me if I'm wrong or right? When you when you have an illness, you don't try to cure the symptoms. You cure the disease. Markets and their optimism whatever, are symptoms of the Fed's battle with inflation. How successful the FED is or might be, it's inflation that's the disease, not the markets. Does that make sense to you? It

does make sense, Um. But the same time, I think the Fair is probably looking at the easing in financial conditions that has been taking place via a weaker dollar as well as stronger stock markets, and probably looking at this is going against the impacts of their policy decisions. It does effectively, whether it's direct or indirect, have some impact on inflation, as it does boost balance sheets of companies, consumers feel healthier, spending increases. Potentially it could feed into wages.

I mean, there's a number of angles here that the FED is probably looking at. And the reality is that we know that core services inflations in the US, tight to the labor market is still very very high and elevated, and the FED is concerned that they will need to like rate much more significantly. So of course, if equities are much stronger, it kind of plays into that some extent. I do understand what you're saying that the partly it

is a symptom, and that's very true. But I do think that the easy in financial conditions in general is probably not something the FED wants to see at this point in the cycle. However, I think that Brian stated perfectly is it seems how investors look at this, the FED is punishing us. The Fed is causing pain. If you look at it from the Fed's point of view, They're doing what's necessary unfortunately to bring down ultra high inflation.

And if they ease up because investors feel the feel pain you know, it's actually the workers are going to feel the pain, not the investors as much. Um, how do you handle that as someone who's got to run money, because now you have to gage two um elements, you've got to gage the FED, and you've got to gage

the market's reaction. You know too that that's right. I mean, look, I think pain is is the key word here, and I think really where the pain is something that the set is targeting is going to be in the labor market, and as yet we're not seeing that. We've seen anecdotal evidence that many companies are starting to look at shedding labor and start layoffs the process of layoffs, but the reality is, if you look at the job stata, it's

still pretty strong. Wage inflation is still very high. And I think the said fees this is key um in terms of only say inflicting pain, but it will be jobs pain that's going to be the key hereof and from the asset markets. And when they do finally start to see that coming through, I think then we can start talking about hitting the terminal rate and potentially even cutting rates further out. But at this point we're just

not there. And I think, you know, that pain partly and indirectly when when companies are struggling in a sense of against higher interest rates and pressure on profits which are likely to intensify, that will hurt equity markets, that will potentially lead to more layoffs, and indirectly that could put some lower pressure eating pressure on the wages. And I think all of that is is directly going to

be linked with head policy. So clearly wages very big part of this store, as you mentioned, and we had a big balance over the past eighteen months. Coincides with we did have a pandemic. So it's a big question. Is it a one time or is there some structural change in the economy now that could be permanent which gives you this feedback loop in which prices and wages

drive each other up. Yeah. I think the risk is that what we've seen via COVID and the the structural shifts that we've seen in the labor market, you know, the great resignation, the shift in the demographics, the whole structure of the labor market shifting towards a significant work from home tyme, bias, productivity changes all has an impact that could be more prolonged going forward and could weigh

on the FED thinking. And I think the reality is at the moment, you know, is we talk about what keep talking about wages, but really wages are the key. If we don't see any easing in pressure in wage growth and earnings going forward, it does suggest effects policies not taking effect, and I think that means again we go back to an issue of pain. But all of that means that we will probably need to suffer more pain via even higher rates, a higher terminal rate going forward.

We think the terminal could get up to five and a half per cent um into next year, but the risks are still skewed towards even higher rates if we don't see any easing in these pressures. So what does this mean from emerging markets? Because coming into the end of the year, a lot of people have said, that's what we're going to see opportunities If for no other reason,

then the inflation problem isn't as bad. Uh. And yes, the FED may put pressure on the dollar and downward pressure on emerging market currencies, but they still see some you know, areas where you can make some money. What do you see? I think emerging markets have been backward significantly in the last year or so, and obviously a lot of that is through higher FED rates, it's through general pressure on risk assets and worries that China's growth

is weakening and COVID concerns, etcetera, etcetera. And I think you know, the one positive factor for EM into the next year is positioning is very very light. We've seen a huge outflow from e M as sets. I think what benefit EM is if the FED, if the market sees the FED peak UH and potentially starts pricing and easy, that will start pushing flows back into emerging markets assets that are in some ways pretty cheap and under invested. So I'm a little bit more constructive on e M

next year. I know there's going to be a lot of economic pain. I'm not particularly bullish on China next year, but I do think we may see better prospects for e M assets. We've just seen China leave the loan prime rates unchanged, the one year at three sixty five and the five year at four point three zero percent, so no change there, no extra stimulus. Um your thoughts on China here in the shorter term where they have these issues tied to the reopening. I think China is

going to struggle in the near term. I think the reopening process is still a little bit uncertain. It's still got a lot of volatility in it. We can hear anecdotal evidence of a ramp up in COVID cases even if you've issue in numbers are not showing that to some extent because they're not counting a symptomatic cases. The data I think is going to be fairly weak in the next one or two months. But medium term, I

think the opening up is a positive. I think as we go into next year, it will help to push them upside risk to Chinese activity, potentially getting us up to sort of five percent or above growth. We're not talking about seven eight percent we've seen in the past. But I think you know, there is still a lot of constraints on the economy. Trade is weakening, Exports aren't going to pick up anytime soon. Uh, Consumers are still very cautious of property sector still under a lot of

pressure despite recent measures. So it's going to be a very slow grind to recovery for China's economy in the next several months. Well. A lot of concerns possibly a budding humanitarian disaster, and that the cases are starting to run through a population that's not fully vaccinated. And then also we had the US expressing concerns that we might see some mutations that could extend the grip of this

virus on on human kind as it were. Anyway, Mittle, thanks very much, Mittle, Katachia from Ted's Securities