A 50 basis-point rate hike 'would be welcome' as markets anticipate a hawkish Fed: Strategist

Baird Investment Strategy Analyst Ross Mayfield and Dana D’Auria, Envestnet Solutions Co-CIO and Group President, join Yahoo Finance Live to discuss the economic outlook ahead of the Jackson Hole Symposium and the Fed's next interest rate hike.

Video Transcript

[AUDIO LOGO]

[MUSIC PLAYING]

[BELL RINGING]

[APPLAUSE]

[CHEERING]

RACHELLE AKUFFO: And there you have it, your closing bell for August 23. Let's take a look at how the major indices fared. The NASDAQ couldn't hold on to those gains, though, ending flat. As we see there, the Dow losing there about half a percent. The S&P 500 losing about 2/10 of a percent. And as I mentioned, the tech-heavy NASDAQ seemed like it was going to end in the positive, but ending relatively flat, down 0.27 points.

Well, let's break this down for a closer look at the broader markets with our panel here-- Ross Mayfield, Baird Investment Strategy Analyst, and Dana D'Auria, Envestnet Solutions Co-CIO and Group President. A big welcome to you both. So Dana, I want to start with you. What is your takeaway from what you're seeing with this market action as they really sort of wait to see what the Fed is going to do on Friday?

DANA D'AURIA: Yeah, we're getting a lot of mixed signals, I think, that the market is just needing to contend with. You've got some signs that maybe we're getting to peak inflation, at least in the US, perhaps not overseas. But still a terribly high, painful inflation print in July that the Fed clearly has to tackle.

I had thought it was premature, the market rally for the month or so that we had where the expectation was maybe the Fed would be a little bit more dovish than was thought. And really, the numbers didn't support that all that well. But the good news is job market remains tight, great earnings season compared with what we thought it could be. I do think that we are seeing guidance a little bit lower now for 2023, so some good and some bad.

RACHELLE AKUFFO: Ross, what about you? Because we have equities about rallying just about 17% from the lows that we saw in mid-June. Do you think it still has legs? I know a lot of it hinges on the Fed policy here over the next several months.

ROSS MAYFIELD: Yeah, I think it has legs. But I think you have to extend the time horizon, right? We wouldn't be surprised at all to see a move lower here, or at least some chop to the sideways, some volatility. As mentioned, you still have high inflation, a Fed that's going to be tightening into the year-end and into the next year as well.

You still have geopolitical drama. You still have domestic politics that will come into focus with the midterm elections. So there's a lot of positives underlying it all, a lot of nice fundamentals. But there's still a lot of headline headwinds to contend with.

So it was a really strong rally. We think it's more than likely not a bear market rally and something a little bit more than that. But they don't go up and straight to the right, so we'll expect a little more volatility here in the near term.

DAVE BRIGGS: Dana, we get PCE on Friday, then we sit and we wait for Jerome Powell to speak at Jackson Hole as the markets are holding their collective breath. The word is, we expect a more hawkish Powell. What is your expectation? How do you think markets react?

DANA D'AURIA: Yeah, I do think you get a more hawkish Powell. I mean, look, it's a bet, right? And the Fed has tried to signal this, I think, to a certain extent, that we're not out of the woods, we have to continue to fight inflation. And the job market remaining tight empowers the Fed to continue to do that. I mean, just look how far apart the Fed funds is from the inflation rate now.

We're still at 8.5% year-over-year inflation. So is it going to be 75? Maybe it's 50. We can cross our fingers for 50. I think market reaction is starting to already now price in that the Fed will be more hawkish. So if we get 50, that will probably be welcome to a certain extent because I don't think anybody's expecting lower than that.

RACHELLE AKUFFO: And Ross, when you look at the action in the bond market, what is that signaling to you right now?

DANA D'AURIA: Yeah, the 10 years-- I mean, certainly the curve is very not only inverted but we just have a lot of up and down in that curve. It's kind of all over the place. The 10-year being now moving up just a little bit reflects perhaps an anticipation of where rates go. But we were higher in June. And I don't necessarily see us getting back to that. So my take on bond markets is that they're processing the same information and what the likelihood of the Fed increases are as well.

SEANA SMITH: Ross, how about you tossing in the same question, with the 10-year still above 3% moving, what, up 2 basis points today, what do you think? What's your big takeaway from the move and really the upward trend that we've seen in the 10-year yield?

ROSS MAYFIELD: Yeah, I think exactly right. So you've got Fed speakers out the past couple of weeks pushing back against this pivot narrative, talking up the fact that they're going to be raising interest rates in the year end, probably next year, and certainly not willing to go as far as saying they're going to cut rates next year, which the market is still pricing. So I think they've started to move markets a little bit.

You've seen Fed Fund futures, Eurodollar futures shifting, the terminal Fed Funds rate a little bit higher, still indicating cuts in the back half of next year. But I do think that all of their jawboning and hawkishness over the past couple of weeks is starting to show up. But you still have a market that I'm not sure quite believe that they'll stick to it as the economy slows through next year.

DAVE BRIGGS: I think the Jackson Hole drinking game is about data dependence and a lot of work to do. You drink every time you hear that.

SEANA SMITH: OK, it could be fun.

DAVE BRIGGS: OK, it's on a Friday afternoon.

SEANA SMITH: Yeah.

DAVE BRIGGS: I'm just telling you. All right, Dana, we've also seen a lot of volatility in the crypto space. Do you expect some regulation? Where will it come from, and will it finally bring a little bit of stability?

DANA D'AURIA: Yeah, for a lot of people. I think it would be about time, right? The IRS knew right off the bat how it wanted to regulate crypto. I don't know about any of the other agencies. Right now, what you're seeing is a battle between the SEC and the CFTC and who's going to be the primary regulator on crypto.

There's a couple of bills in Congress right now that would choose the CFTC for that. CFTC is probably not as harsh, right, maybe a little less stringent. The SEC would probably regulate more tightly. So if you're a crypto bull, you're probably hoping for the CFTC. But Congress is finally starting to look at this and say, hey, we do need to map out what this is going to look like and have some additional regulations here.

SEANA SMITH: All right, Dana D'Auria, Ross Mayfield, always great to speak with you both. Thanks so much for joining us this afternoon.