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U.S. dollar ‘on a downward path,’ strategist says

HSBC Chief Multi-Asset Strategist Max Kettner joins Yahoo Finance Live to discuss the expectations for the Fed as inflation remains sticky, the choppy path ahead for the U.S. dollar, market volatility, and the outlook for a recession.

Video transcript

BRAD SMITH: The Fed raised rates by a quarter point while suggesting that some additional policy, that firming might be necessary. Our next guest expects that rate hikes at the May and June policy meetings are to come. Let's welcome in Max Kettner, HSBC chief multiasset strategist. Max, if you're expecting rate hikes at both of those meetings, to what extent would we be looking for any type of rate hike? Is it both 25 at both of those meetings? Is it 50 and a 25? What say you?

MAX KETTNER: No, it's probably two 25s. I think it probably goes back to what you just mentioned. It's the Fed is returning to getting data dependent and perhaps going a little bit away from those recent wobbles we've had in the banking sector, of course. I would say, just to what you guys were just talking about, it is somewhat astonishing, I would say, when we look at, for example, at the S&P over the last 10 months, which is literally just after the Fed started raising rates, first 25, then 50, if we look at the last 10 months, the S&P is flat. Nothing's actually really changed.

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So it's quite interesting to see how that stacks up with sentiment and positioning, which you already mentioned with the AAII survey. And I would stress also that it's not just survey-based sentiment, right? When we look at our shorter-term sentiment and positioning indicators, whether that is on the options market, whether that is technicals, whether that is VIX futures curve or really a range of other short-term sentiment and positioning indicators, they all tell us, look, people are already pretty grim, right? Despite the level of the S&P and the NASDAQ not really falling off, sentiment is already sufficiently grim that you can actually stay constructive.

JARED BLIKRE: I want to talk to you about the US Dollar Index and, just in general, the US dollar. If we go to the YFi Interactive, I have a longer term chart of the DXY. And, of course, this is kind of an older weighting of the US Dollar Index but, nevertheless, very looked to as a bellwether.

You can see the incredible run-up that we had from 2021 into the latter stages of 2022 came down. And the dollar weakness was associated with a risk-on trade. It facilitated that. Just wondering what your outlook is for the dollar, given all this volatility that we've seen.

MAX KETTNER: Yeah, I think the dollar, the dollar is still probably broadly on a downward path because two things. Number one, if we look at the dollar over the last two and a half years, it's actually been broadly really tracking short-dated rate differentials, so basically US rates, how they were faring against European rates and against a range of other global rates. So does the US pay more at the front end than other jurisdictions? And that has really shrunk in the last couple of months and really the last six months. And unless you expect that is going to be incredibly on the rise again, so unless you expect that the Fed is going to go, I don't know, to 6%, 6 and 1/2% and all the other central banks remain put, then there is, I think, a basis for a stronger dollar. But that looks heavily, heavily unlikely.

The other thing, the second factor is what you just mentioned, that risk-on, that risk-on sentiment. When we look actually at G10 currencies, so the currencies of the largest economies worldwide, if we look at that over the last two or three months, they've been more and more correlated with those risk-on, risk-off gyrations. So we do expect that perhaps some of that volatility that you just mentioned, as that perhaps subsides in the next couple of weeks, that that is giving the all-clear to a short dollar trade once again.

BRAD SMITH: Max, for anyone who's continuing to try and parse through what the Fed is saying, what Yellen is saying, and then, additionally, what the ECB is saying this week, what the UK boards have done in terms of their own rate policy as well, all of this considered, people just want to know how to set up or best position their portfolio, knowing that it's not just about a US rate policy and rate strategy. It also is about what companies are going to be exposed to policy that's happening elsewhere around the world. So how can they go about that positioning?

MAX KETTNER: Yeah, look, perhaps the first comment, I think, from what you just mentioned around what the Fed is saying, what the Treasury saying, what the ECB is saying, the Bank of England, look, I think less is more, right, in these situations, in these situations where it's highly uncertain. And I actually, I question perhaps what value-add it is that Chair Powell, for example, on Wednesday during the press conference mentioned the word "uncertainty" six times. We know, right? We know things are uncertain. You don't have to put additional fuel to the fire. That doesn't help, right? It really doesn't help.

Or it doesn't help that every two days, we get another news flow on the deposit insurance. So that certainly doesn't help. That's very, very, very discouraging, I think, for longer-term investors, right, because what can you do if yields go up 20, 30 basis points one day and then they go down the same amount the next day?

I think where you want to be positioned now is probably not any more in the growth part of the equity market, right? So what you guys were talking about around some of the growth and the tech stocks really being extended already, I think that decline in yields is probably starting to come an end. And that means also the strength of growth stocks starting to come to an end. That means more rotating into value. It means also rotating into emerging-market asset classes.

And it also means rotating into high-yield credit because if you actually say, look, things are broadly OK-- our leading indicators, for example, are picking up. Our earnings indicators are picking up. So from a macro and a bottom-up perspective, things are kind of OK, right? And as long as the equity market, as long as we remain in a trading range, that's actually pretty good for carry positions, right, for high-carry positions, such as high-yield credit.

JARED BLIKRE: So if things are kind of OK, just wondering what your recession outlook is here because if we're talking about you liking the high-yield market, we're not talking about 2008 banking crisis on the horizon. What do you think is in store for investors on the economic front later this year?

MAX KETTNER: Yeah, I think the recession debate won't come before the second half of the year again, right? I don't think so because, let's remember, what we will get the next couple of months, particularly in the US, is we'll get hugely disinflationary effects from supply chains, so from goods prices, from energy prices. So it's not unthinkable that we've got a 3%-ish inflation by June, July in the US this summer. So that means perhaps a bit of a rebound in consumer sentiment and consumer spending that actually means things will become better before perhaps they become worse.

So I do think the earliest we'll probably be talking about recession again is sometime in the second half of the year or perhaps into 2024. But for the next four or five months, I think we're fine. I think we're actually on the other trajectory, that, actually, things are picking up and becoming slightly better now. And that's not only in the US. It's also in Europe and also in China.

BRAD SMITH: HSBC Chief Multiasset Strategist Max Kettner, Max, thanks so much for the time and the insights today. We appreciate it.