Craig Shapiro, Senior Macro Strategist and Cross-Asset Trader at Ninja Trader Live: Fed Chairman Warsh didn't reveal much this week, but he seemed quite optimistic about economic growth, largely due to positive factors in the AI sector. Given the decline in oil prices and the resulting lower inflation breakeven point, while I think the threshold for raising interest rates may be higher than the market believes, the threshold for cutting rates is actually much higher as well. Given Warsh's positive assessment of economic growth,
for the Fed to actually cut rates,
a significant deterioration in the labor market might be needed. This is especially important given his hints that balance sheet reduction might take longer.
Of course, a single labor market data point isn't enough to constitute a trend, but if there starts to be increasing evidence that the labor market is slowing, while at the same time the Fed's timeline for policy easing is lengthening (especially against the backdrop of still high inflation), then I suspect this will create an unfavorable environment for risk assets.
In this environment, rotating from AI concept stocks to riskier cyclical stocks or small-cap stocks will become increasingly difficult, and investors may only be able to favor defensive sectors, and perhaps gold.
