‘We must bow to the trade of surrender,’ strategist says

Jack McIntyre, global fixed income portfolio manager at Brandywine Global, joins Yahoo Finance Live to discuss Treasury yields and bonds, the possibility of further rate hikes and the labor market.

Video transcript

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JULIE HYMAN: Yesterday’s CPI report, and of course this morning’s PPI report show that inflation is higher than ever, 9.1% for consumers, 11% for businesses on a wholesale basis. Now the focus turns to the Fed, another rate hike is on the horizon. What will be its size? Our next guest says, why stop at 75 basis points?

The Fed may indeed need to move 100 basis points. Let’s call on Jack McIntyre, portfolio manager at Brandywine Global. Jack, good to see you. So you tell us in your notes, “something has to break here between inflation and the economy.” Looks like the market is leaning towards breaking the economy.

JACK MCINTYRE: Yeah, you’re absolutely right. So if you’re a Rocky fan, you remember Rocky [INAUDIBLE] Clubber Lang was asked about his prediction with his fight with Rocky becoming a word, pain.

BRIAN SOZZI: Pain. Pain, good, I love it.

JACK MCINTYRE: Pain, yeah. It’s painful for the equity market, it’s going to be painful for the real economy to break inflation. But it’s really, is Powell going to be like Volcker and kind of explain this to us? And if we do, hey, the recession might be milder. My concern is that if they don’t inflation expectations are no longer anchored, then that means we’re going to have to have a worse recession in the next two years.

BRIAN SOZZI: Jack, do you think the Fed will take a sledgehammer when it comes to trying to fight inflation? I would say they haven’t yet, but we’re now talking about a potential 100 basis point rate hike at this meeting. Do you think they could make two back to back?

JACK MCINTYRE: Oh boy, that’s hard. It’s hard. Clearly, and you know, I mean, the markets were leaning towards 100. It’s going to be interesting because we’re very close to the quiet period.

I don’t know if we need to ask Waller today to send us a message that the Fed is open at 100. Back to back 100, boy, a lot can happen by September. So I’m not there yet.

JULIE HYMAN: So even with the potential 100 basis point increase at this meeting and further increases after that, you’re in long-term Treasuries, which kind of continues to be a counter-intuitive trade . I mean, it’s kind of the counter-intuitive trade that worked this year, isn’t it? That we haven’t seen yields increase as much as you might think given the rise in rates.

JACK MCINTYRE: Yeah, Julie, so my gut tells me we kind of got through the bond market sellout. I mean, by some metrics, this is the worst bond market performance in hundreds of years. I mean, the reason is that basically the bonds didn’t have a coupon.

Well, now with saving returns, hey, they pay a coupon, so you have the advantage that the coupon return impacts the total return. And again, when I say we’re buying Treasuries, we’re snacking, going neutral or slightly overweight. What I would really like to see is some weakness in the labor market. If we see weakness in the labor market, boy, then I’d be more inclined to stock up on cash.

BRIAN SOZZI: Do you think that’s the next pain point for the markets, labor market weakness?

JACK MCINTYRE: I do. The challenge, however, is that we know labor is a lagging economic indicator. I think, however, that this cycle is way overdue. Because we, the companies, have struggled to find workers, the shortage of workers.

So it may take a bit longer for the labor market to start showing real weakness. But again, you’re looking at the weekly unemployment claims that we just got. There were also signs of weakness there. So we’re following that very closely.

BRIAN SOZZI: I like this reference to Clubber Lang. I really like this movie “Rocky”. In fact, we’ll see him again this weekend. Jack McIntyre, portfolio manager at Brandywine Global. Happy to see you.

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