Around the World in Less than 30 Minutes

Lawrence Gillum (00:00):

<Silence> Hello and welcome to this week's LPL Market Signals. My name's Lawrence Gillum. I'm the Chief Fixed Income Strategist here on the LPL Research team, and we're doing things a little different for this week's Market Signals podcast. We are coming to you in our LPL office here in Fort Mill. Joining me of course, is our Chief Economist, Dr. Jeffrey Roach.

Jeff Roach (00:19):

Hello.

Lawrence Gillum (00:19):

How are you?

Jeff Roach (00:21):

Doing great. We have a guest that's not in Fort Mill.

Lawrence Gillum (00:24):

That's right. We're very excited to introduce our very first outside guest to LPL Market Signals. So we are very pleased to be joined by Phil Rosen. He is up in New York. So, I've looked at his background. I think the takeaways are journalist, entrepreneur, and market strategist. That sound about right, Phil?

Phil Rosen (00:43):

I think that captures it. Yeah. I'm the chief strategist for Pro Cap Financial as of a week ago. So excited to be here. Thank you so much.

Lawrence Gillum (00:51):

Well, thank you for joining us. Really appreciate the opportunity to talk with you about markets. The goal today is to talk about what's going on around the world in less than 30 minutes. So why don't we start with kind of just a level set with you, Phil, and talk about kind of how you're seeing the market and the economy kind of what you're hearing, what you're doing just to kind of level set expectations on kind of how you're thinking about the global economy these days.

Phil Rosen (01:17):

Yeah, I, you know, we really came into the year extremely bullish. Of course, there was a lot of optimism about what the bull market could continue to do, and that's really been dampened, obviously, with the geopolitical as a new macro force this year. But what's amazing to me is that markets are essentially gripping onto any little piece of good news for mega optimistic rebounds. And we've seen that in the last few days. And, you know, the ceasefire, it is on pretty fragile ground, I would say. And we don't really know what the next 10 hours even will hold. And yet markets are still showing their resilience that bull market resilience is coming through. And I think that's surprising a lot of investors because the bearish take has been so overwhelming with the Iran conflict. And we're talking about oil shocks, we're talking about geopolitical uncertainty, and yet markets are only down a few percent from their all-time high.

Phil Rosen (02:15):

And my sense is that in the year after an oil shock, markets are almost always up double digits. So this isn't always apples to apples to say, hey, this compares to x, y, z in history. But I do feel like markets are on the right track, and the earnings story is so good still, earnings expectations keep getting revised higher, actually as we've gone in through the year. So to me, the noise of the geopolitical uncertainty has actually been way less of a bearish headwind than I think most people expected. So, that's really what I'm looking at right now.

Lawrence Gillum (02:50):

That's a great point about earnings. Earnings season kicks off this week. And I know that we've done a lot of work. Our Chief Equity Strategist, Jeff Buchbinder has done a lot of work on earnings. So more of that to come as well. But Jeff, let me switch gears to you and get your view on kind of how you're thinking about the economy. Coming into the year within our Outlook publication, we penciled in an above trend economic growth year, still hold or are we a little bit more cautious right now?

Jeff Roach (03:17):

Yeah, so above trend for 2026, but definitely slower than 2025 and 2024. So kind of put it into perspective. You're thinking about, you know, some of the unusual data prints coming during those reopenings post-COVID and just remind folks, and not a surprise here, there still is this ripple effect, even though we're, you know, sitting in early 2026. So slow down in 2026 from 2025, I think that still holds, but the slowdown is not going to be as dramatic because we had expectations from some of those tailwinds from higher tax receipts and some of the infrastructure strength. Does our base case forecast change? The answer is yes. The follow up question is how dramatic of a change. So when I think about it, I say step back here. We know there's in essence kind of a supply chain pressure buildup going through in the Middle East, but I always like to put this in perspective of previous shocks.

Jeff Roach (04:24):

Phil, you just made the comment about, well, in previous oil price shocks, we know that there's a recovery in the next 12 months. Well, let's look at it slightly different, we know we had a supply shock in 2022 globally, and not just oil, but supply across the board. So just kind of a, you know, under the hood inside look for our audience. One of the things I look at is from the New York Fed, they publish on a very regular basis a supply chain pressure index. And that basically captures not just supply chains as it relates to oil tankers, but supply chains based on, you know, based on semiconductors and what kind of shipping is coming out of other parts of the world, going into other ports. You know, how is L.A., Long Beach port? How's the Berkeley ,Oakland, San Francisco port system looking, how's Savannah, Charleston, et cetera, New York.

Jeff Roach (05:21):

So where we are right now, we're post 10:00 am Monday morning as we're recording this. So clearly a lot of conversations about blockades on the Strait of Hormuz. We do have tighter supply conditions across the board. Still, though a lot softer less pressure than where we were in 2022, when auto manufacturers couldn't get necessary components for basic manufacturing needs, so downside risk to growth, upside risk to inflation. But I think, as Phil rightfully pointed out, we're not in a position as dire as the 2022. Clearly, when you think about the financial sector, not quite the stress we saw in 2008, 2009. So that's where we are, do expect about a 2.1% growth Q1. We do think that there'll be some further slowdowns in Q2, Q3, but perhaps back to a little bit of that above trend growth in Q4 from a growth standpoint, we can talk about inflation in a little bit.

Lawrence Gillum (06:34):

Yeah, great commentary there. I appreciate that. We did mention, as we are recording this Monday, April 13, we did talk about the fragile peace and ceasefire agreement taking place. Certainly the news over the weekend, U.S. blockades within the Strait of Hormuz altogether. I do want to get your thoughts, Jeff, on the inflationary dynamic. Oil is still above a hundred dollars, whether you're looking at Brent or WTI, the impact that could have on consumer confidence as well as consumer spending.

Jeff Roach (07:04):

Well, I think the question on the consumer confidence and spending is actually one of the reasons why we thought we should get someone boots on the ground in New York City. So Phil, thanks for that. I think from an inflation standpoint, it's really important to remember that the shock in the Middle East is most likely going to impact inflation more than the impact on growth. Because remember, we still had years of very strong real disposable income growth for the consumer. We still had millions upon millions of households refinance back in the day. And so that freed up a lot of cash for households, two thirds of households in the U.S. are homeowners. And so remember, it's inflation impacts harder in the near term than growth. We do think we'll have probably a three and a half percent annual pace of inflation in the near term, especially if you have high energy prices lasting for another month, we're going to see second and third order effects show up.

Jeff Roach (08:11):

But that will take time. By definition, there's second and third order effects. And so there's really a lot of a wide confidence band in a forecasting say, point we think about in inflation for Q3 and Q4. So either way you look at it, we went into this year with upside pressure on inflation in the near term, particularly in financial services, insurance, healthcare, and the dynamics of the demographics in this country is certainly going to add pressure in healthcare, starting to see maybe signs of that easing up a little bit. But we do have the shock on the oil side of things and that will eventually show up in more of the durable goods component of inflation.

Lawrence Gillum (08:54):

Alright, Phil, how are you seeing things as it relates to the shock of oil prices as well as the potential impact on consumers?

Phil Rosen (09:07):

The most recent inflation report, I think we saw a 10% jump in energy prices for CPI, that was honestly not that surprising. And we should expect it with what we've seen with gas prices, oil prices with the Iran conflict. But generally, I'm not sure if these are bearish long-term trends we should be fixating on, right? And I think the interesting thing right now is that the market has separated itself so much from the economy, maybe more than we've seen in years past. And it comes back to that earnings story. Earnings have been so robust and things keep seemingly getting better on the earnings side, even as we're seeing maybe headwinds to economic growth and we're seeing some inflation concerns and there's a bunch of labor market weakness that's starting to pop up. You got a lot of people talking about AI displacement of jobs and all those things are sort of economic headwinds that in a weird way seem to be supportive of asset prices. So I think asset price or asset owners will continue to do extremely well and almost as an agnostic feature of whatever's happening in the macro. So it's kind of a confusing moment, but generally I don't see how all the bearish macro dampens the stock market outlook by that much

Lawrence Gillum (10:33):

Appreciate that. And just real quick, as it relates to kind of inflation expectations from the perspective of the fixed income markets, the bond markets are kind of giving you a pretty divergent message as well. If you look at short term inflation or market implied inflation expectations, whether you're looking at inflation swaps or break even TIPS markets, there has been some unanchoring in the one to five year parts of the inflation expectations part of the market. But longer term inflation expectations are still pretty well anchored, which is good news for the Federal Reserve, that does allow them potentially to stay on pause a little bit longer than they would be otherwise had those inflation expectations become unanchored longer term. So with that in mind, I do want to talk about central bank activity and kind of what the current dynamic that's going on in the Middle East could have on central bank activity. We've seen some pretty dramatic repricing both as it relates to the European Central Bank as well as the Federal Reserve. Phil, I'll start with you. Federal Reserve was expected to hike rates at one point this year. How do you think that they're going to handle this conflict and kind of what are your expectations as it relates to Fed hikes or cuts?

Phil Rosen (11:41):

You know, Jerome Powell's really leaving at a great time, I think. He is coming out of his Fed chair position right as the macro gets totally unpredictable. So, I think Kevin Warsh should, you know, if he does indeed step in as the next Fed chair, it looks like he will, he will certainly have his hands full. And I think the expectations for him to go in and just do President Trump's bidding and flatten rates to zero, we're probably not going to see that because he's going to have to take a note from Jerome Powell. Powell was so good at generating consensus at the Fed, and Warsh has to come in and try to match that so he can't come in and make unilateral calls on what the interest rate level is going to be. And I think that was a sort of a missed piece in the general media conversation because a lot of people said, okay, he's just going to go in, be Trump's guy and get us to a ZIRP

Phil Rosen (12:34):

again. That's not going to happen because he's got to convince, you know, a dozen other people to vote in the same direction as him. So, I think the Iran conflict certainly complicates Kevin Warsh's job. And I don't know if we're going to see any hikes. I think the labor market is still a little too fragile to justify hiking interest rates. And there's a lot of companies still that are struggling with these higher borrowing costs. But the case for cuts has probably dwindled in the last four weeks. But again, if we get some type of near-term ceasefire or resolution in the Middle East, I don't see why cuts couldn't come back on the table because I think the market would react very quickly and very positively to a geopolitical development like that.

Lawrence Gillum (13:21):

Thank you for that. Jeff.

Jeff Roach (13:22):

Yeah, so I think in this case, you think about where the Fed sits relative to say the Bank of Japan, European Central Bank, Bank of England, other major central banks. In some ways you have a little bit more in your favor for the Fed. So Warsh, interestingly enough, there was an article on the Bloomberg terminal just recently talking about Warsh trying to invoke the maestro, which of course is Alan Greenspan. And Alan Greenspan got really you know, a lot of kudos because he observed something in the 90s that was going on that was truly a structural shift. There was this break between labor market statistics, like unemployment wages, and then the risk to inflation and growth. So in the 90s, he basically said, hey, we think that there's this opportunity for a productivity boom.

Jeff Roach (14:14):

And so despite unemployment being very low and wages starting to rise, there's not an inflation risk here. It's because we're going to have this productivity boost that's going to dampen inflation pressures, allow the economy to run hotter than it normally would. So, think fast forward 2026. I think that does make a lot of sense, and I think Warsh is right to make that connection. I think he's got to be a little bit careful in kind of arguing from a Greenspan position. Warsh is coming in without a lot of history with current members of the Board of Governors and current members of the Federal Open Market Committee. Now he has experience at the Fed overall, but in terms of current sitting members around that table, I think he's going to have to work for consensus. And just briefly on the international side of things, you think about where we sit as an economy.

Jeff Roach (15:12):

Yes, there's pressure on the labor market, so we're having a lot slower pace of non-farm payroll growth. But we do have this shakeup in participation rates among ages. And it does seem that AI's hitting those that have just less experience in the labor market relative to those say 35–55 that have the experience, probably not quite at risk. You don't have the same dynamic say in the Bank of Japan. They made news just earlier this morning, again, we're recording on Monday the 13th, and they made news. A lot of these policy makers made news because you have a very weak yen, when you have a weakness in the economy, the economy can't really handle any massive changes in policy right now. So Bank of Japan probably not having the ability to hike rates despite inflation running maybe finally above zero. But a lot of weakness, particularly because of the reliance that that economy has on oil coming through the Strait of Hormuz.

Lawrence Gillum (16:24):

Alright, good points. We'll touch upon ECB in just a second, but I do think it's important to kind of you know, give you both kudos for the comments about the Fed Chair being part of a committee and not having so discretion over the rate setting environment. I think, you know, his job has gotten a lot harder with this Iran conflict. And what's interesting is markets realize that. Markets have gone from pricing in, again, some additional rate hikes earlier this year to a Fed that's on hold, despite the fact that Kevin Warsh may be taking over as the chair of the Federal Reserve. So markets aren't necessarily buying this notion that he's going to come in and cut rates back down to ZIRP either, I think, which is good for the markets. That said, I think if Kevin Warsh does come in and try to aggressively cut rates, it could be counterproductive to the Trump administration's agenda because we probably will see longer-term interest rates move higher on the back of increased inflation expectations, which would impact, negatively impact mortgage rates as well.

Lawrence Gillum (17:21):

So, and housing affordability. Real quick as it relates to the ECB Jeff, the ECB different mandates than what we have here in the U.S. Federal Reserve, with their duel mandates, the ECB with their single mandate as it relates to inflation. Markets are expecting two to three rate hikes out of the ECB this year. Are we in agreement with that?

Jeff Roach (17:43):

I think markets do not have it, right? I don't think they're pricing it correctly. And we've seen this over the last, really the last several quarters, Lawrence, you and I have actually talked about this, how markets expect something to happen and then just, you know, one piece of information, there's a complete turnaround. Yeah, a resetting of expectations. We saw this back in 22 and then the following years on what markets expect the Fed to do. So, one of the things that I look at when I think about, okay, where do these global central banks sit? Where do these global economies rank? I think what's really interesting, latest, PMI numbers, so Purchasing Managers Index, is available for the month of March for most economies across the globe. I'm giving you a little bit of this detail because it's important. March is important because it's post-Iran attacks and it incorporates some of the dynamics of the challenges in oil markets.

Jeff Roach (18:45):

You see, I think quite a bifurcation between certain economies and the rest of the world. So PMIs did pull back across the board, but remember anything above 50, when you think about that metric, anything above 50 means the economy still expanding, yet U.S. still expanding, meaning businesses both in the manufacturing sector and businesses in the services sector are still expanding. Even in the month of March, there was still growth on a real basis relative to February. However, you think about Japan, France, Italy, Spain, Russia, China, those indices actually fell further below 50, meaning they're contracting in March more than they were contracting in February. So I think that's very, very helpful when you think about how the economies stack up, particularly with that shock out of the Middle East.

Lawrence Gillum (19:43):

Alright Phil, I'm going to put you on the spot real quick. Given everything that Jeff just talked about in terms of economic data in the international markets. Are you a fan of international markets here?

Phil Rosen (19:53):

You know, I can't say I follow the international markets as closely as Jeff, but I I do like international markets and emerging markets as far as the equity investing side, you know, I think Korea's been an unbelievable bet the last year and a half. And right now it's pulled back quite a bit given the uncertainty in Iran, oil prices, energy prices. But again, a lot of the near-term dislocations, I, you know, I want to be careful, of course. But it would, history would suggest these are all buying opportunities right now. And I still personally, I think Korea still looks very attractive. That's probably the most compelling international market I'm paying attention to. There's a lot of opportunities in Latin America. I think Brazil is very interesting, but as far as the macro in the weeds data international markets, Jeff has me there by a landslide.

Lawrence Gillum (20:46):

<Laugh>. Well, I was thinking equity markets anyway, so you answered it perfectly. So I appreciate that. Apologize about the confusion of the question there. We only have a couple more minutes left. I do want to get your views on the dollar. Dollar has been under fire for the last couple years about safe haven status. It performed well or has performed well during the Iran conflict. Phil, any thoughts on the dollar and kind of how are you thinking about the USD?

Phil Rosen (21:13):

Yeah, I see a lot about this you know, the general sentiment of like, sell America or move off the dollar. And even this idea now with Iran wanting to use cryptocurrency for a toll booth set up in the Middle East, and you know, who knows what happens there, right? But at the end of the day, there's not going to be a currency that matches the liquidity and the institutional trust of the dollar and its status as a reserve currency. And I think even if you have, let's say, winning sentiment on the dollar and maybe a divisive political landscape, I'm not sure if we'll see anything that looks like a collapse in trust in the U.S. dollar, because we're going to have way bigger problems than geopolitical concerns if we do actually see the bottom fallout in trust for the U.S. dollar. And look, we're going to continue to see rising deficits as well in the U.S. and other developed economies, and the U.S. dollar is still going to be the only game in town. So, and again, I'm not a currency expert, but from a big picture view, I don't know how much we'll see as far as you know, anything beyond changes at the margins.

Lawrence Gillum (22:29):

Yeah, I mean, we've been hearing about the demise of the dollar for a long time. Jeff, what are you thinking?

Jeff Roach (22:34):

Yeah, that's right. I think it's valuable to do just kind of another double click on that. When you think about DXY, that's kind of the common index that's dollar based. I think going a little bit deeper, look at the dollar relative to Swiss Franc. Look at it relative to the yen. Look at it relative to the Euro. And we see dollar appreciation against those other major currencies, which suggests to me that there's still this overall trust and still a benefit from the safe haven component. Whenever there's a shock, whenever there's a spike in uncertainty, spike in volatility, the dollar has certainly benefited from that bid even in the last several weeks. So, what that means clearly is during times of stress, you know, certainly you know, kind of pull back and remember, you know, the bias toward domestic you know, opportunities there.

Jeff Roach (23:28):

And then remember also that this is you know, not an approach for a trading environment, per se, an investing environment in terms of, we've done a lot of publication, our blogs and Weekly Market Commentaries about the role of having a longer-term plan and sticking to that plan. <Laugh>, we discussed it there. In terms of going back to, you know, managing and looking at stress and how it will impact the economy. We just wrote about it in the Economic Navigator and the Weekly Market Commentary for this week. So, certainly since we're tight on time for this podcast, if you want to go deeper, look at those publications.

Lawrence Gillum (24:04):

Awesome. Good stuff there. And yep, this conversation flew by. So we do want to thank everyone for listening today and certainly thank you Phil, for joining us on the LPL Market Signals. And congratulations on your new gig. And we really do appreciate you spending some time this morning with us to talk through your views. And of course Jeff, thank you for your time. It's always great to hear your insights. So with that, we will wrap. Thanks everybody for watching LPL Market Signals and we will see you guys next time. Take care, everyone. Thank you.