Why the Fed May Keep Rates Higher for Longer

Markets higher after the release of the July jobs report.

The report showing that unemployment rate hitting its lowest level this year despite non-farm payrolls falling.

Now this follows another, another record week here on Wall Street as the Dow surging Wednesday, while the S&P 500 and the Nasdaq did lag.

Now the blue chip average continued that trend yesterday morning, but then a sharp reversal sent it lower.

And joining me to discuss more is Jonathan Dane, founder and CEO of Defiant Capital Group.

Jonathan, good morning and thank you so much for being with us.

Hey, good morning.

Thank you.

So Jonathan, let's go ahead and start off with the breaking data this morning.

What does this jobs report mean for the markets?

The biggest thing that when we look at it is if you take a step back, everybody was concerned previously that rates were going up too fast.

They were going up too fast and so we have a new Fed chair.

He comes in with the expectation of being more dovish of starting to do rate cuts.

Well, now we take a look at the economy again and we have inflation heating everything up.

We have oil prices skyrocketing, and so there's a huge concern that we might actually have to raise rates.

I think what we're seeing from this jobs report and why the market is reacting so positively is that while we do have a steady economy, it doesn't look like any Anything is overheating.

And it puts the Fed in a really good position to simply hold rates where they are right now, which given the push and pull on both ends of the side, is a great position for him to be in.

It gives markets a little bit more certainty, which is all they've wanted, and that's why we're seeing the bump upward this morning.

All right, so let's talk a little bit more about the US-Iran conflict which has been on pause for the past week.

So we've gotten reports over the past few days that a deal is close to open the Strait of Hormuz.

So tell us where oil prices and inflation stand amid the pause in this fighting.

So, oil prices, in our view, will continue to be extremely volatile through the rest of this year.

And that's mainly because as we've seen play out time and time again, this round tripping of oil prices based upon every new piece of news that comes out.

And so, right now, everything looks good again, and we're seeing oil come down.

But as we know, right now, it's all talk, it's all speculation, and until the deal is signed, until both sides can agree to it, and Oman comes in and agrees to it as well as we saw the other night that they're now a part of this agreement, we actually think oil prices, there is no clear path forward right now.

We think they can hold down.

Here, but remember, ships still aren't coming through and so we're pricing in future oil expectations, but we simply don't have the supply to live up to it.

And I think as demand for oil continues to rise, and until the US can put something together, oil from here in our view is still an inflation driver, and we're still more pessimistic on its trajectory going forward.

All right, so since we've been mentioning inflation and job data, let's talk about the Fed.

That's been top of mind for a lot of people.

So there will be another jobs report for the central bank to consider in September, but it's still unclear right now if we're going to get a rate hike next month.

So will the markets start pricing one in?

Right.

We came into this year with a full expectation of rate cuts.

That has drastically changed how we think about it now.

I think that realistically, until we have clarity on what happens with the Strait of Hormuz and oil, that a rate hike next month, very unlikely, but by the end of this year, we know that the that the pricing pressures from oil from the rest. inflation take time to trickle in.

I think it's more likely that by the end of the year, we do see a rate hike going forward and so that's how we're thinking about the portfolios right now and how we're positioning investors that we could see those longer end rates definitely keep moving higher towards year-end.

All right, Jonathan, so top of mind for Wall Street right now is also AI.

So this week we saw earnings sell-offs from AMD, Sandusk, SpaceX, and Western Digital.

So, what has the earnings season shown you about where the AI trades currently stands?

Yeah, it's been a great earnings season because our theme for the year has been returns have to be earned.

And that is what has really played out for the first time in the 2nd quarter earnings.

Any firm that simply was living on an AI promise.

They had, hey, we're gonna spend billions of dollars on an AI facility, it's going to lead to something, we'll see.

It's going to trust us, it's going to produce something.

They're no longer being rewarded.

Instead, what you're seeing, especially in the AI trade is the companies that are being rewarded by the market, those that are making money, those are the ones that are actually having positive EPS impact from it.

And on the one side of it, you absolutely have the pick and axes, the memory makers.

There is a sustained shortage of memory.

Their price increases are holding and so that is a place that's winning.

But on the other side of it, if you look at the more traditional, uh, traditional is a funny word, but the more stable the Mag 7, the large cap tech, those firms that actually are delivering the EPS, uh, accretion, the EPS benefits that came from their AI investments, markets are rewarding them.

But those companies that simply said, we're just going to keep investing, investing, investing, we'll figure it out.

That is no longer working.

So there's a big bifurcation happening in the AI trade.

So Jonathan, let me get your outlook for the future of AI leadership at the moment.

We're still, we're still very positive on the trade.

We continue to believe that the hyper scalers and the large firms that are putting the biggest money in will win.

We think ultimately the AI trade, there is a core group of winners that will win.

What we like right now though, While those are a core position, we continue to believe that the pick and ax, whether that's the memory, whether it's the data center buildout, we like what the trends are in that space despite the near-term volatility and so we are bullish onto that going forward still.

So Jonathan, I also want to get your thoughts regarding uh the yen carry trade.

So what's going on here after the US and Japan worked together to strengthen the currency, and I know it's been a couple of years since Japan and the US actually ended up working together on something like this.

Yeah, I think what it's showing, so there's a lot of currency uncertainty in the markets right now too, especially as it gets tied to oil prices.

What I think investors are focused more on right now is if you're gonna put your money in a currency trade.

This is dollar intervention trying to help the yen, but more importantly, it is dollar intervention.

And I think what it's showing more than anything else is that the US dollar still today remains the focal point of the currency trade.

And so whether you're looking at the yen, whether you're looking at the euro, or thinking about how oil gets priced, at the end of the day right now, it is still dollar-focused and for us, I think that is the more important takeaway from it of what carries forward.

All right, Jonathan, to wrap up, let's go ahead and turn to crypto really quick.

The industry has been in a bear market since October 10th.

So what factors are you currently watching?

We watch crypto closely and right now in crypto, it's what I would say it's a complete risk-off environment and that's a couple-fold, but one, from an institutional level, we know institutions piled money into crypto.

We know they viewed it as this diversifier, this uh alternative for lack that they need in their portfolios.

But the correlation between crypto and the broader market simply has not reversed.

It is still a positive correlation, which means crypto is moving in the same risk on manner as large cap tech, as the NASDAQ, as the S&P, and until we see a break there, there's not a lot of benefit for people to keep putting money into it.

And on the retail front, the retail traders that drive up, whether it's Bitcoin or Ethereum, Solana, what they're seeing is they can do the same type of high-risk.

Highball trades, but now they can do it in the memory chips, or now they can do it in semis.

And so from both ends of crypto, you do not have a positive catalyst to keep driving it higher.

And so near term, we are very much more stable.

We don't see crypto massively moving higher right now without some type of government call that they're gonna do something else with crypto that we saw earlier this year that drove it up.

But near term, we're not looking at crypto as a massive bullish play.

Awesome with Jonathan Dane, thank you so much for joining us, founder and CEO of Defiant Capital Group.

Thanks again.

Thank you.