No reason for the Fed to cut if the economy is holding up at these higher rates: UBS' Jason Draho

Little more than half an hour before the opening bell on Wall Street investors digesting comments from Fed chair Jerome Powell, he said inflation hasn’t been coming down fast enough. Joining us now is Jason Drejo, head of America’s asset allocation at UBS Global Wealth Management. Jason, great to have you with us. Good to be here. Thank you. Hire for longer, something that you know markets have been dealing with, but now it’s longer, if you will. Is that a deal breaker for this rally? I don’t think it’s a game changer for the rally because partly why the Fed is going to have to be maybe on higher for longer is just because the economy continues to chug along at a relatively elevated pace in terms of economic growth. The consequences of course is that’s keeping inflation elevated. But if the economy is holding up at these higher rates, there’s not necessarily a strong reason why the Fed has to cut. So it’s not great for the markets in terms of going higher, but it’s also not a reason why the markets need to pull back significantly from these levels. What are we going to see from earning season in terms of companies dealing with higher interest rates, dealing still with higher prices in terms of Labor at the very least? And I’m asking this because part of the key to this, you know, chugging along economy is the consumer piece of it. And while consumers have been increasing their debt amounts, they’ve been, you know, doing, you know, using their savings. They’ve been taking on credit card debt at higher interest rates. As long as they’re employed, that’s OK. But as soon as that stops and that starts showing cracks, that’s a problem. Well, what we’ve seen thus far, at least for the financials when it comes comes to the consumer is that, you know, the message is the consumer is still quite healthy and we’re seeing that across a variety of data. You mentioned the credit card, it’s ticking up. What do you think about overall wealth? Like just in the fourth quarter alone, total household wealth in the US increased nearly $5 trillion, total household debt 200 billion. So the balance sheets of households in aggregate are still in quite good shape. We’re not seeing signs from the banks, you know, world signs of stress. There’s some anecdotes from different kind of consumer companies of stress, but it’s also seems to be more of a reflection of mix shift. A lot of services spending still maybe not quite as much on the good side. So I think the message still is that the consumers holding up reasonably well, that’s the case. The economy should continue to hold up. You might be though a couple of bad auctions away from a 5% on the 10 year yield, Jason. Mean as we sit at 5 month highs at this point on the 10 year yield and we could tick higher for various other reasons. Is there a number where you think you know that’s trouble for equities? So I think we kind of think like 475 is probably a level where you can get some real stress and equities. It’s not just a level, it’s also the pace. So if you get a move of 75 basis points in two months, that’s a bigger problem if it as opposed to occurring over the course of like five or six months. If it does shoot up to 5% as we kind of had last fall, you’re definitely going to see some stress and equities at the same time. I think you’re going to see like we saw last fall and that’s just kind of step and willing to buy bonds by duration at those levels and yields could kind of pull back you know pretty quickly the only stay at those levels if we really have a repricing of where the Fed’s terminal rate is. It’s not nearly where it was last October. I think that has to be the kind of key catalyst for rates to stay higher for longer. And then that’s also kind of predicated on frankly the growth outlook being you know, resilient as well. So it’s a bit of a you lose on one side, you gain on the other, right. Jason, great to speak with you. Thank you. Jason Drejo, UBS.