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Inflation: ‘The stagflation question is now on the table,’ portfolio manager says

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Guild CEO Sean Bonner and U.S. Bank Wealth Management Global Investment Strategist Tom Hainlin join Yahoo Finance Live to weigh in on how the upcoming CPI data is impacting markets.

Video transcript

- So, taking a look at what we saw going into the close, Sean, they sort of have this pullback ahead of the CPI data tomorrow. How much of this is an overreaction?

SEAN BONNER: Well, I don't know if it's an overreaction. But I can tell you that nobody wants any part of this number tomorrow. We're sitting in inflation at near 40-year highs. And I think now we've got a slowing economy. That's pretty clear from import prices that we've seen over the last couple of weeks. So I think the stagflation question is now on the table. And that's the nasty scenario that nobody really wants a part of.

- Tom, what just happened? It looked like some moderate losses about an hour ago. So, in this last hour, what do you think was the signal that sent the markets over the top? And what type of number tomorrow would see some relief in the markets?

TOM HAINLIN: Yeah, you know, it was a lower volume day. And you saw the acceleration downside after Europe closed-- so digesting what we heard from the ECB. I don't know that you're going to see much of anything tomorrow. It's going to move the needle either way. If you get a relief in the inflation number, it will probably get brushed off. And you hear a hot number, it's still probably doesn't reflect the high energy prices that we're already seeing here in the first part of June. So, probably not much either way that we're going to see in CPI tomorrow. It's going to move the needle on what Fed policy looks like at the June meeting, the July meeting, and then perhaps out into September.

- Sean, I know you're saying you don't want any or nobody wants any part of tomorrow's number. But in terms of inflation and the trends that we have been seeing, is it safe to say or do you think inflation has peaked yet?

SEAN BONNER: You know, I think inflation may have peaked. But it may have peaked at 8.5% and hover around 8%. It's still not a great scenario. The Fed and the administrations talked about transitory. I think we know it was fantasy for a while. But what's going to be persistent about inflation, I think, is that the situation in Ukraine is going to contribute to that. We're going to continue to see high--

- Oh, sorry. Keep going, Sean.

SEAN BONNER: Yeah, we're going to continue to see higher food and energy prices due to the war in Ukraine. You know, I just returned from there a few days ago and saw it firsthand. Ukraine is traditionally the breadbasket of Europe, with 10% of global wheat, 14% of global soy, and 50% of global sunflower oil coming from there. You've got these oceans and oceans of beautiful green farm fields now sitting empty because of the war. You've got no farmers to farm it because they're all fighting. And also, you've got the potential for land mines and mining issues as the Russians have pulled back from that central part of Ukraine.

- Yeah, Sean, I just wanted to get real quick your reflections. I know this is your second trip to Ukraine. If you could, just comment on how conditions have deteriorated over that time.

SEAN BONNER: Yeah, well, conditions in terms of the war itself have continued to improve. But, actually, the overall conditions, I think, for the economic sector, have continued to deteriorate, right? As we kind of go forward and miss harvest after harvest in the Ukrainian farmlands, that's going to impact global prices. And then when you look at the front lines of where the Russians are concentrated now, that's all in the Black Sea. And most of the exports for Russia and for Ukraine in terms of wheat and soy all come out of the Black Sea. For Ukraine, it comes through Odessa. And that's why that's sort of the key battle point that they're looking at now on the map.

So you've got this double-headed spear that's going to be a real problem, right? You've got a labor shortage in terms of farmers. And you've got farmland that's now been mined. And then also, you've got access to it because it would be a major shift to try and have to move those commodities-- move those food stocks-- out towards the west through Poland via rail. And we all know that-- or we've heard lately that the Russians have been targeting the rail systems for supplies coming in. But I wouldn't be surprised to see them targeting for commodity stocks going out as well. So it's a bad situation, and it's going to be persistent for some time. And I think that's going to contribute to inflation being very, very sticky here at the 8% level.

- And, Tom, as we know, obviously, when it comes to inflation, the pressure on food prices and energy in particular is something that really hits home for people. How do you expect the Fed to react to this? And what might we see in terms of how that affects things like earnings going forward?

TOM HAINLIN: Yeah, the Fed's going to have a hard time challenging anything around energy price inflation or food inflation. They're just trying to slow down the economy and slow down demand for food and energy. And that's going to take time. I mean, the stimulus from last year is still flowing through the economy. So we're likely to see the Fed increase interest rates by 50 basis points at the meeting next week and then again in July. There's a lot of speculation about September.

But as you just heard, the upward pressure on commodity prices, on energy, and on food prices is not likely to alleviate through the summer season-- the cooling season and the driving season. So the question will be, how does the consumer respond? For now, what we're seeing them do is dip into savings they accumulated during the pandemic. Retail sales have been strong. Consumer spending has been strong. But we need to see what that looks like throughout the summer and then get a gauge on what the Fed does then as we get towards the end of summer into early fall.

- So as you're talking about the Fed, Sean, just bringing it back to you in terms of the war in Ukraine and Russia-- obviously, that could have an impact here in inflation. When we talk about geopolitical risk in the market, how should investors-- how should the market be looking at it at this point if you're saying that this is an issue and that this is a massive challenge here that doesn't look like it's going to let up anytime soon?

SEAN BONNER: Yeah, well, I think we've got to look to the supply side, right? Domestic supply for energy is certainly something that should be on the table-- and then ways to improve the situation in Ukraine and transport out of Ukraine, as well as global harvest. The EU just came out and updated their predictions for the wheat harvest out of the EU being down 5%, which is more negative than they've been in the past. So the problem when you see these downticks in exports from Ukraine and Europe in terms of wheat and in terms of soy-- it contributes to global food insecurity in the rest of the world, especially on these fringe areas where people are living close to famine-- Africa and the Middle East. So you can see, certainly, ripple effects in terms of political instability from a bad harvest situation from this war.

- Wow, it's remarkable. Tom, if you could, comment on what are you seeing from the consumer that gives you an indication about the relative strength?

TOM HAINLIN: Yeah, [INAUDIBLE]. You're seeing the savings rate dip down a little bit, but it's relative to what they accumulated during the pandemic. We haven't seen them drop that completely down. So they seem fairly confident and in reasonably good shape to continue to spend. A larger proportion of that is obviously being taken up by food and energy prices. So the consideration is, what does that look like through the summer? Do you see any alleviation of those prices? Or does the consumer start to slow down, having drawn down the bulk of that accumulated savings? But, for now, they seem in reasonably good shape. But obviously, that's something key to watch as we traverse this summer season.

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