As Wall Street braces for key inflation data, Wells Fargo Securities’ Michael Schumacher believes one thing is clear: “The Fed is not your friend.”
He warns that Federal Reserve Chair Jerome Powell is likely to keep interest rates high for longer, which could leave investors on the wrong side of the trade.
“You think about the history of the last 15 years. Whenever there was weakness, the Fed rushed to the rescue. Not this time. The Fed takes care of inflation, and that’s about it,” the company’s head of macro strategy told CNBC’s Fast Money on Monday. “So, the idea of a lot of easing – forget it.”
The Labor Department is due to release its January consumer price index on Tuesday, which will reflect the prices of goods and services. On Thursday, the Producer Price Index will be in the spotlight.
“Inflation could go a long way. But we don’t know exactly what the goal is yet,” said Schumacher. “[That] makes a big difference to the Fed — if that’s 3%, 3.25%, 2.75%. That’s up in the air at the moment.”
He warns that early momentum of the year cannot coexist with a Fed relentlessly fighting inflation.
“Higher yields … don’t sound good for stocks,” added Schumacher, who believes market optimism will eventually fade. So far this year, the tech-heavy Nasdaq is up nearly 14%, while the broader S&P 500 is up about 8%.
Schumacher also expects risks related to the Chinese spy balloon fallout and tensions in Russia to add volatility.
For reasons of relative safety and some upside potential, Schumacher still likes the 2-year Treasury note. He recommended it during a Fast Money interview in September 2022, saying it’s a good place to hide. The grade now yields 4.5% – a jump of 15% since this interview.
His latest forecast calls for three more quarter-point rate hikes this year. So that should support higher returns. However, Schumacher notes that Fed Chair Powell still has a chance to change course.
“Some people on the committee tend to be quite reticent,” Schumacher said. “If the economy is looking a little weaker, if the jobs picture is a little bit gloomy, maybe they’ll talk to Jay Powell and say, ‘Look, we can’t go along with additional rate hikes. We’ll probably need a cut or two soon.’ He could lose that argument.”
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