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Economic outlook explained by ‘low expectations and resilient corporate America’: Strategist

Allspring Global Investments Senior Investment Strategist Brian Jacobsen joins Yahoo Finance Live to discuss the economic uncertainty in the U.S. and why the resilience of the markets will make a difference, and also weighs in on Chinese markets.

Video transcript

- Let's take a look at the broader market action, all three of the major averages now in the green. The Dow up 148 points. Visa, Disney, Coca-Cola leading the way this afternoon. For more on today's market action, we want to bring in Brian Jacobsen, Allspring Global Investment's senior investment strategist.

Brian, lots to focus on this week. We had the weak data out of China this morning, a number of retailers set to report earnings over the next couple of days. How do you think the market is digesting what we heard from China and what this means here for the US?

BRIAN JACOBSEN: Yeah, it was actually kind of a pleasant surprise to see the way that the market digested the Chinese data. You have the industrial production numbers falling short of expectations, retail sales falling short of expectations. And even though the People's Bank of China did cut rates, it was only by about 10 basis points, so 0.1 percentage points. To me, that seems a little bit like a kind of a rather weak response to it.

But the market seems to be in a rally mode right now. And I think a lot of it is because there was quite a bit of damage that was done in the first half of this year, more than a 20% decline in the S&P 500. You had more than a 30% decline in the NASDAQ. So there was a repricing of the market, so already expecting a lot of bad news.

And so far at least with the US data, things are looking a little better than people perhaps were fearing. And I think that can explain the resilience of this market so far, is just that low expectations and a resilient corporate America.

- Some, Brian, have suggested that the market is rallying on the thought that the Fed will have to cut rates late next year. In fact, New York, former New York Fed President Bill Dudley said markets are misunderstanding the Fed's inflation response. Are they?

BRIAN JACOBSEN: I don't think so. And, I mean, I have a tremendous amount of respect for Bill Dudley. So don't get me wrong on this. But I do think that the market is pricing in a continuation of the Federal Reserve hiking rates. It's just at a somewhat slower pace.

Now, when you do look at market-traded instruments, as far as the Fed funds futures, what is that telling us about what might happen in 2023, yes, that is pricing in some rate cuts. But we have to take that with a massive grain of salt. I mean, the Federal Reserve is effectively flying blind as far as when it comes to what the economic data will be. And so are market participants.

I mean, I think that really what the market is pricing in is that if we do get a slowing of growth and inflation at least heading in the right direction, if things get too bad when it comes to the growth outlook that the Fed will eventually cut. However, I don't think that's a foregone conclusion. I think that if we continue to see growth maybe finding a bottom here, getting a firmer footing going forward, that the Fed can maybe put things on cruise control in 2023 instead of needing to actually cut rates.

- And Brian, we did get that slightly tamer inflation report, I guess you can call it that, of just around 8 and 1/2%. Do you think we're starting to see some light at the end of the tunnel?

BRIAN JACOBSEN: Yeah, so here it Allspring on my Systematic Edge Multiasset Team, we've been talking about that. And it's kind of weird that we would be cheering at an 8.5% year-on-year inflation number, right? I mean, it's tame, but only relative to the 9.1% that we saw for the month before.

But the important thing is that it's heading in the right direction. We released a blog saying that we think that actually the inflation outlook is about as clear as mud. And I think that's a good description of what the outlook really is.

Yes, we have this incremental improvement. But we need to see another month's worth. When you peel back the layers of inflation, there are signs that the services from like, say, owners' equivalent rent, other services, that part is firm and increasing.

But the durable goods, nondurable goods-- so nondurable goods would be like food and fuel, whereas durable goods would be like appliances and autos. So those goods parts might actually tip into deflation. But the services, that's more the persistent trend. And that's where it's still a long road that we have to walk here to get inflation back to 2%. But maybe we've taken at least the first step in that direction.

- All right, let's hope so. Brian Jacobsen, good to see you, sir. Thank you.