March CPI still acceptably slower for Fed: Citi's Lucy Baldwin

Joining me now post nine with her Fed playbook is City Research Global Head Lucy Baldwin. Nice to see you. Thanks for having me. All right, so how, if at all, did this morning’s shocker for many impact your outlook? It wasn’t a game changer from our perspective. So yes, it was a hotter reading than the consensus expected and slightly hotter than we expected. But as we look into how that translates to core PCE, which of course is the key Med fed measure, that’s right for us, it’s not actually so material in the sense that a number of the categories that were hotter this time don’t really translate. So of course, we’ll see what the PPI print brings. But for us, we’re still sticking with our call that we’re going to get a cut in June and that will be the first of a number of cuts this year. And we’re still expecting 125 basis points of cuts this year in total. OK. So we’re getting cuts. Does that mean you’re bullish stocks? It actually does mean we’re bullish stocks, but not super bullish. So I would say it’s sort of constructive with some caveats. So our Goldilocks scenario that we’ve been talking about this year for stocks is, is 5700. But really for that to come through, you really need to see more of a soft landing. So less cuts and the Goldilocks scenario of actually quite good growth, but not too hot, not too cold and inflation, you know, coming back to trends. So our base case in aggregate for the S&P is 5100, which is obviously broadly kind of where we are, right. But there are a lot of areas within that where we are quite constructive on the market. Are you not super bullish in large part because we’ve already had such a huge run? Is it difficult to be super bullish now given given the run? I mean, directionally it sounds like you’re positive because the UX have expectations of of rate cuts, but those expectations of rate cuts started months ago. That’s why we’re here. Yeah, absolutely. Look, I think for us, you know valuation, if you look at it versus history, we’re at like 90th percentile level. So I 90% of history it’s been cheaper than this to buy the market. Doesn’t mean for us it’s the trigger to sell the market here. And our thesis is broadly you get a broadening out both in terms of earnings growth but in terms of the stocks that are actually going to perform. So we don’t expect last year to repeat in terms of you know 60% of the performance being driven by the Magnificent 7. And to some degree we’ve seen that already as the Magnificent 7 has shifted into the before and you’ve started to see some of the big secular things playing out more broadly whether that’s across AI or healthcare or obviously energy security in transition. If if your outlook for the Fed and and the number of cuts that you expect turns out to be wrong, will your outlook for the stock market be wrong? I think so just to just to breakdown what we’re saying on the economy, right. Our our core view here is that you’re going to see growth softer in aggregate this year than last year, like near a 2% global growth from three. And we think really tightening is going to start to bite services starts to sort of unwind the heat in that segment. And also you’re going to really start to see as well as those two things coming through less fiscal than we saw last year in terms of the delta. Is that going to be enough to trigger a recession is then the sort of big question that we get all the time. And for us, it’s really this view that the labor market is starting to really weaken in the US, whether it’s the higher rate, whether it’s the quick rate, whether it’s SMA business Conference, obviously the NFIV print we saw just recently in terms of that confidence level, forward CapEx expectations, people not really feeling confident about getting the next job. Like all of those things we think mean that when you project forward, you could get a payroll number that could really surprise people, something like a 50,000 print in May, right. I think would be a big shock to the market and oh, you think so? You think it’d be a negative shock ’cause, you know, we’re, we’re in this back and forth debate based on what we feel like doing at the moment as to whether good news is bad news, bad news is good news. So a softening of the labor market may actually at this particular time be looked at as as good news because we figure it’ll be, you know, disinflationary. Yeah, you’re right. Look for the equity market for sure. The the perfect scenario, that 5700 Goldilocks scenario we’ve got is like two or three cuts for the year. So kind of where we’re now getting to for the market, but where that’s not so much driven by sticky inflation, which is what we’ve just seen today, but more because growth is really, really good. And I think if you’ve got that dynamic that’s the best scenario for the equity market from here. But I don’t think that’s quite what you’re seeing with the CPI print. And our core view is also that this inflation, this last mile is much stickier. And I think structurally when you look out next year and beyond, the inflation backdrops also pretty complicated due to supply chain reconfiguration, the energy transition and security concerns and the whole of the sort of geopolitics playing.