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Market strategist: Don’t expect any surprise from the Fed

State Street Global Advisors Chief Investment Strategist Gaurav Mallik joins Yahoo Finance Live to discuss expectations for the Fed’s November meeting, the markets, and supports for the U.S. dollar.

Video transcript

JARED BLIKRE: US job openings rose to 10.7 million in September, surprising to the upside and indicating the hot labor market is not cooling as quickly as a Fed may have hoped. Joining us now is Gaurav Mallik, State Street Global Advisors' Chief Investment Strategist. Thank you for joining us here today. Just want to get your take on what you think the FOMC, the Fed has in store for us, when it announces its decision Wednesday and then what we might expect in that chair presser later on that afternoon.

GAURAV MALLIK: I don't think we should expect any surprise from the Fed. So I think 75 basis points, as advertised. I suspect they will focus their attention mode on being data dependent.

I think that would be a very reasonable path to take, as there is still a couple of prints to go between now and year end. And I think the pricing of about a terminal rate of $4.75 to $5.00 now seems in line with expectations. So I don't think there's any surprise to expect from the Fed.

I think the challenge for them is going to be this trade-off between inflation and growth. So the focus is very much on what I would call spot numbers, so what's going to occur with the CPI. Whereas, some of the leading indicators are beginning to indicate a slowdown. The labor picture, of course, creates a separate complication for the Fed.

JARED BLIKRE: And let me ask you about the yield curve here, because as I indicated at the top of the show, the 13-week T-bill yield climbing across 4% for the first time since, I believe, 2007. That's according to CBO data. I'm just wondering what this-- this is the inversion that the Fed is really paying attention to, when the 13 week on the short end rises above the 10 yield on the long end, and that is happening as we speak. What are the implications for this?

GAURAV MALLIK: I mean, generally, when you think about-- so clearly, Fed is focused on this. But generally, when you think about inversion, in our experience in looking at past recessions, and as you think about recession activity, I think that 10s/2s is what matters a bit more. We generally see flattening starting to occur about three to five quarters after the first hikes.

So if you think about March, that would suggest to us that maybe we start thinking about flattening some point in time occurring and call it Q2 of next year, say Q1, Q2 of next year. Which may set us up for Fed talking about perhaps growth concerns and maybe about rate cuts towards the end of the year. So that's, I think, how we're seeing this play out over the next several months.

JARED BLIKRE: And I got to ask you about two of the major headwinds that markets have faced this year. One is the strong US dollar taking a little bit of a breather recently and the other is China. We know that the Chinese stocks took a huge hit this year, and part of that is their idiosyncratic story with respect to President Xi taking on a third term over the year. But what does a strong dollar in weak China mean for you and any potential inflections there that you see on the horizon?

GAURAV MALLIK: Yeah. I mean, I think that one is that-- I mean, I get it, that there was quite a lot of negative reaction from the conference. I think our approach is let's wait and see, sort of like the news that came out today, a little bit about that maybe there's COVID relaxations. We do see signs that maybe that is the path that the Chinese authorities will take.

I think if you look at the dollar and playing-- sort of throwing China in the mix, those are two supports for the dollar. One is the carry trade. We know that peaks some point in time between now and say Q1 of next year. And the other one is the growth trade-off, that the US is removed from Russia-Ukraine issues, energy is less of a concern than other parts of the world. But the Fed is focused squarely on bringing down growth in the US.

Conversely, in China's case, there's only upside. Right? I mean, we're probably going to see somewhat near trough growth, as we look at this year. From our standpoint, that's somewhere between 3, 3 and 1/2, and next year, we do see prospects of both fiscal easing. We see prospects for COVID reopening. That gives a chance to say that perhaps Chinese growth may surprise on the upside.

We have that pegged at about 4 and 1/2 to 5, as we look at next year. I think that growth differential matters a lot, because as investors are stoking the growth differential, perhaps, we start seeing a peak and maybe even a decline occurring in the dollar, which should be positive for non-US assets. That would be Europe and, of course, EMEA and China.

That whole complex tends to benefit with that trade. So it's definitely worthwhile to pay attention to what occurs in China. And I would just encourage people to wait and see what actions get taken, rather than just the rhetoric.

JARED BLIKRE: Well, we're going to have to leave it there, but we thank you for your insights here. Gaurav Mallik, State Street Global Advisors' Chief Investment Strategist.