Remy Blaire: Fresh consumer price data is in this morning, giving Wall Street a clear look at inflation. And this does come as we saw oil prices elevated in the previous session.
Well, with rising energy costs and elevated Treasury yields weighing on equities in the previous session and digesting this morning's hotter-than-expected core CPI figures right now, Fed funds futures pointing to about an 85% chance of a rate hike next week.
And joining us live here at the New York Stock Exchange to weigh in is Mike Dickson, head of research and product development at Horizon. Mike, good morning. Thank you so much for joining us.
Mike Dickson: Absolutely. Thanks for having me.
Remy Blaire: Well, first and foremost, I do want to say that today is the 25th anniversary of 9/11. And here on the trading floor, we are welcoming the committee here, and we will be observing a moment of silence shortly.
But of course, when it comes to the markets, give us your sense of what today's inflation figures mean.
Mike Dickson: Yeah, I think we're seeing the numbers come in basically a little bit hot. I think it pretty much solidifies what's going to happen next week.
But even more important than the inflation data for next week, I think, has been the elevated oil prices and diesel that we've seen, which made it very clear he's interested in much more real-time data and not stale data.
So now that we have a backward-looking number, a little bit hot, and elevated prices, I think that seals the deal.
But I also think it's very interesting and expected to see some of the long end of the curve actually calm down as a result, because I think a hike next week could go a long way with instilling confidence and reducing volatility on the long end of the curve.
Remy Blaire: Yeah, and what a difference a session can make. Because yesterday we were looking at elevated Treasury yields and elevated oil prices for both WTI as well as Brent prices.
And we were looking at U.S. stock averages extending losses for consecutive sessions in this holiday-shortened week. But this morning, here we are. We're looking at an advance for the stock averages.
So tell us about the task ahead for the Federal Reserve.
Mike Dickson: Yeah, I mean, one of the things about, you know, the equity markets as it relates to rates, though, you have to admit they've been extremely resilient to elevated yields.
And I think that's in large part due to just the extremely strong earnings, of course, that we've had this year. And that provides a really firm foundation, you know, giving way to that stability.
But, you know, when it comes to the Federal Reserve's task at hand, I think we actually got quite a good amount of framework from Warsh at Jackson Hole, making it very clear that this inflation picture is definitely number one on the list.
And that's certainly solidified after such a strong labor report that we just had. And so with these, you know, elevated oil prices lately and, you know, some of the fiscal concerns that we saw with the Treasury auction earlier this week, you know, frankly, I think a hike can go a long way to show that the Fed is ahead of the curve and really committed to that mandate.
And I think that would be a good thing for rates and markets overall.
Remy Blaire: Yeah, and there are a lot of moving parts here when we're looking at the broader market. So, of course, we have been paying attention to earnings expansion, and that has obviously been something that we're all paying attention to, given that it has supported the equity averages.
But when we focus on AI leadership, what are you looking at right now? Why?
Mike Dickson: Yeah, when it comes to the AI leadership, I think a couple of things are telling. I mean, first of all, we saw really strong earnings reports from Nvidia and Broadcom. We got a really solid demand outlook from TSM this week.
But one of the things that you should notice is that the price reaction from those names in the broader memory space was not particularly positive. You know, flat to slightly lower on that news.
I think that goes a long way to show that a lot of these, you know, growth expectations are in those prices.
But at the same time, software and services, which sold off, you know, on SaaS apocalypse concerns earlier in the year, have, you know, really had a very strong quarter because earnings reports that we've seen just recently, Oracle, Adobe, Salesforce, you know, show that these companies are actually able to make money off of using AI to drive revenue and earnings and not just make money off building it.
And I think that's the next phase of the trade. And where I'm looking at for the rest of the year is kind of that handoff from that phase two infrastructure to more of these folks using the AI.
And I think software is primed, at least price-appreciation-wise, still flat on the year. So a great entry point for that as we head into the rest of the year.
Remy Blaire: And of course, when we take a look at these sectors within the S&P 500, it goes without saying that energy has been leading the way higher.
But when it comes to avoiding defensive traps, what do investors need to know?
Mike Dickson: Well, frankly, this is not a time to be defensive, right? I mean, I think when you look out over the next several quarters and you look at earnings estimates, we are, unless we get massive upgrades, which we have been, we're likely to see earnings growth kind of come down a little bit.
But that is not a time to get defensive at all. We still have a very booming economy, very solid, you know, earnings growth and a market that's extremely resilient to these higher levels of rates.
And so, you know, I would certainly avoid defensive sectors and stick more to these, you know, AI users. I like life sciences kind of in the healthcare space. You know, financial services, very, you know, prone to being helped out with that AI productivity.
Obviously, the software and IT services space. I think those are all great places to look, kind of diversify a little bit away from some of the semiconductor and AI infrastructure that has done so well this year.
And I think that could really take the baton for the second half.
Remy Blaire: Well, Mike, appreciate your time. Thank you so much for joining me in the aftermath of the CPI print. I appreciate your insights as well as your perspective. Thank you.
Mike Dickson: Thank you.
