Johan Grahn, Head of ETF Strategy at Allianz Investment Management, breaks down the major risks to the markets including how the FED may react to upcoming CPI data.

Opening Bell

Markets Trading Flat as Investors Eye CPI Data Expected on Thursday 

for some more inside in early morning trading. I'm joined by johann gran, head of E. T. F. Strategy at allianz investment management. So I just want to start kind of with a bit of the optimism today, do you think it's kind of following the earnings that we saw last week or something else? Kind of keeping the cheer up up to the market this morning. Yeah earnings certainly helped write. And we've seen this play out over the past week. There's been I think now we're looking at about 80% of the firms that have been reporting have been producing some pretty good results. Now I would put that in perspective too though because part of that is also in terms of how they perform relative to the expectations that have been downplayed at the same time. Right given given some of the concerns that we've seen in the economy but overall, yes it's been set up for a good earnings season, we're definitely seeing that coming through you know earnings obviously last week was a major force moving the market this week, we still have earnings, we have some big names coming in, Disney to Peloton edition this week, we're gonna have some inflation data. Do you think that inflation number potentially moves the markets more than than earnings depending on how high it is? Or do you think we're past the point of a of a peak with inflation. So every every eyeball out there right now is on thursday right to look at the inflation print, there's no doubt about that, no question. And with the with the average estimate now sitting at 7.2% in terms of inflation that would put us up at a 40 year high. I mean that's four decades since we've seen numbers like this. Right? So yes eyeballs will be on inflation now. Is it going to overshadow the earning season? Yes if it if it comes back and it hits on the high side, which is not unlikely. Um It is also the composition of the C. P. I. Itself. You know, we would know that the energy prices have been driving quite a bit of it but at the same time every time you go to the grocery store you know everything seems to be getting more expensive and that is when it gets a little bit more hairy and you're gonna see some consumer behavior is changing um As well. So there's a lot more behind all this and then obviously the Fed is already painted itself into a corner. And depending on where the sea pi print comes in um It doesn't seem likely that they're going to be any further away from that corner. And certainly in terms of inflation and earnings, we have seen the companies that are reporting almost everyone really exciting inflationary pressures and that kind of linkage supply chain issues as being a concern even on the earnings front. I just want to get your thoughts on some of those names that I mentioned a moment ago in terms of those reporting this week, your thoughts on, you know the names Disney and Peloton, what are your expectations? Well, in terms of earnings expectations right? There is so much behind that and if you look at firms like Peloton and this is obviously very different firms and Peloton now getting a completely different type of tailwind that is completely dominating anything that can come out in terms of earnings. So there is a lot of uncertainty in those names as well. But I think it also comes back to the fact that There's a lot of uncertainty ahead of us and it keeps coming back to the Fed and what they're going to do and what they're not going to do. And at the end of the day, you have a really, really slippery slope here because you have, as you know, you have 10,000 people retiring every year, I mean sorry, every day and a huge population that is seeing their earnings now depleting in terms of purchasing power and it's very common right to see and listen to this, you know, buy the dip spiel, but you can't really have that luxury if you're retired and you don't have any cash coming into your portfolios and on top of that, you're also sitting on typically more conservative investments in the bond market. So really where the, where the issue is going to come in and is how retirees will be impacted at the end of the day and that will have a huge impact on spending habits and bring the whole potentially the whole market with it. So those are some of the bigger risks that we see more so than individual stock risks. Yeah, obviously consumer spending being what, two thirds of, more than two thirds of our, of our overall GDP. So that's obviously a major factor. Um, just really quickly want to get your thoughts on that peloton news that you were kind of alluding to. We were polluting to a moment ago. Obviously the news that you know, we could see an acquisition. I think this, this has been rumbled amongst investors for quite some time now, given just how far, you know, peloton has fallen from its kind of glory days during the peak of the pandemic. Um, do you think we could see this acquisition actually happens? Think it's a good news for whatever company I know there's names thrown out there like Apple, even Amazon, I think Nike um, could be a potential contender here. We were showing, just by the way, a chart up a moment ago, a pelton being down about 15% I think over the one month. But today it's up over 25% just on this kind of news. Yeah, it's tough to speculate right. But there is always the, always the potential for an acquisition and in this particular case it might make perfect sense when you can see the benefits from, whether it's supply chains or whether it's deliveries or or or greasing the skills if you will in terms of how things can move through the supply chains and deliveries. I know there's been some some issues on that side with peloton in particular. Right. But those those things can be ironed out by more than one firm. I also want to get your thoughts on kind of the other news out this morning. Frontier and Spirit Airlines merging to create kind of this what would be the fifth largest airline in the U. S. And a competitive environment really for the ultra low fares. What is this signal about the future of profitability for airliners and what's your outlook on the travel industry as a whole? Well, so I'm not, I'm not a travel expert in terms of where the airlines might be, might be going here, but I think it's a sign of some necessary consolidation, right? It's been a tough couple of years for the airlines. There's no doubt about that. And and travel habits are changing and have been changing. And now after having been sitting on the almost sitting on the sideline now for two years in terms of how, how the airline traffic has been moving, it's clear that not just to firms but all firms, all airlines are taking a really close look at their books and trying to figure out what they should be doing going forward and what we're seeing here on the low end, if you will with the with lo and airlines it's it seems like a natural fit, you know, I wonder how do you think about this? I know you're not an expert in this space, but just in terms from a kind of broader investor perspective, do you think this will increase competition in the kind of airline space? Because that's what spirit and frontiers are trying to tout at the moment? Right. Especially amid kind of concerns that they may have some crackdown or some pushback from regulators here or, you know, doesn't do the opposite. Does it kind of take out the bottom two competitors from competing with each other and then potentially kind of, you know, those ultra low fares don't necessarily they aren't necessarily as ultra low. Yeah, no that's a that's a fair point. And I think that it's easy to lose sight of this this argument too. Right? I mean, the airline industry is the perfect example of, you know, something that showed up and and arrived. Just you can draw parallels to what's happening in the market today, frankly, you know, with some of the more I. T. Heavy firms airlines back in the day, you know, when they show up, you think that this is a very simple and straightforward investment thesis because anyone who can fly to the sky will make will make a good living doing it, right? But competition quickly comes in and there's there's no difference in the, in the airline industry, That's a very, very competitive industry and it will continue to be. Yeah, I think just a personal side of things, you know, get, just to your point a moment ago, seeing all the turbulence really around the airline industry. Um, I think at some point, many investors were thinking that we'd have to see some consolidation and I think that's what we're seeing now. We'll continue to follow and see how kind of this this deal actually ends up um, coming out. If we do actually see this merger happen. I want to get your thoughts and kind of put it back to CP I, obviously that's a data point that you were saying, well, most investors are keeping their close eye on this week, that comes out thursday. If we get a particularly high print here, potentially another kind of multi decade high print. Do you expect that the Fed then could come out even more aggressive on interest rates come March. Mhm. Yeah, that's that's definitely something that we will see and would, would be expecting. Right? So right now the market is pricing in 35% probability of of a 50 basis point rate hike. If we see the CP I print coming higher or if the composition is skewing inside of the print itself, then we would expect to see that 35% probably go to more like something like 50 50. So a 50 basis point hike might actually turn into a 50 50 type of proposition. And that can happen pretty quickly and as early as as on thursday, What sectors do you see kind of being impacted the most then? Right because we see initially tech being pulled back but tech has kind of rallied over the last week. It's down now about 6% I think for the last four weeks on the four week average. Um but but that's kind of lower than it was about a week or so ago. Yeah so tech, I mean it rallied you know based on the fundamentals behind the economy, right? So the prints coming in from the job report almost half a million jobs being created in the last month. And then before that you had november and december prints coming in and be adjusted by another 700,000 jobs. Very very big tailwind for the economy and the economic growth. Now it's a double edged sword right? Because that will also put the fed in a position where there are more um hawkish and dovish right? I don't think you have a single dovish feather left around the table today. And with the with the C. P. I. Coming back now on thursday, you know, we might see even even more of a stance. And the firms that will take it on the nose is the same firms that did um did so earlier in the year and it's most heavily the tail sector, the tail sector, the tech sector. So as they have their earnings coming from further out, uh, those valuations are going to come under some serious pressure. Lastly, before I have to go here, you know, the flip side of things, the higher interest rate environment tends to kind of benefit the financial sector, but financial is only about one and a quarter percent over the last four weeks, really feeling pressure and kind of negating the possible opportunity with the, the yield curve. What's your overall, you know, look at financials right now amid kind of this environment where we would see higher interest rates. Yeah, so it's a, so the financial sector is broad, first of all, right, so it's not entirely a simple accident rates come up and, and uh, and the financial sector will rally with that. The financial sector is also heavily dependent on the, on the economy itself. And to your point, about two thirds of it being driven by the consumer spending. So it's not quite that straightforward unfortunately. And you can easily see this trifecta of issues if you have inflation coming through, which effectively is making people's wallets smaller in terms of purchasing power. You also have the rate tax coming through, which basically means that the mortgage rates and credit card debt is going to become more expensive on top of that, you also have relatively high energy prices and again, it's this trifecta that's setting us up in, in the worst case scenario, it turns into a perfect storm for the Fed. Now, the Fed would much rather have a problem of greasing the skids and pouring oil into the Financial machine if you will, as opposed to sand, which is exactly what it's about to do at the March meeting. But without putting that sand in the machine, they're not going to have an opportunity to actually grease the skates later. So it's kind of like a damned if you do damned if you don't, but you have no option right now. If you're, if you're sitting at the head table, um, it will be a hard pill to swallow right now, but it's going to be good for the longer term proposition, giving them an opportunity to help fuel the economy down the road. Great. And so I really appreciate your time, johann, gran, head of E. T. F. Strategy and Allianz Investment Management