This is Why Higher Rates Could Backfire on the Fed

Oil prices cooling off a bit today, but they are still up 29% for the month, helping to put pressure on the major averages. Could the latest push higher in oil prices force the Fed's hand? Joining us is Warren Pies from 314 Research. Warren, it's good to see you. >> Nice to see you. Thanks for having me. >> So, you know, oil rates, they they've gotten back on the radar and and it's very relevant for stocks cuz as you point out, you've had this kind of rotational market, very low correlations among different parts of this market. The indexes have been kind of stuck, but basically the market has basically found a way to hang in there, but you say that leaves it vulnerable to a macro shock. Do we have something like that brewing? >> Um, potentially. I mean, that's an unsatisfying answer. My recommendation to clients is that in to account for that risk, you have to be overweight commodities. I mean, really going back to the beginning of the Iran war and through it, we're saying we like equities, but the big risk here, as you point out, is another flare-up in this unpredictable conflict and the time's not on the side, you know, the longer this goes, the the farther global inventories drain and uh and obviously if you have a long position, you're you're benefiting from back gradation. So, we're pairing that overweight commodity with overweight equity position. I think the reason it's so scary, it's not just about the consumer and how oil hits the consumer, but how it's impacting the Fed and and leading to next week's meeting and then into September. I think it becomes a real risk factor if oil doesn't cool down that the Fed starts um considering a hike. I don't I don't know that I agree with that decision, but the political pressure is real. >> I was going to say, you know, it could be a long wait. Obviously, it is a unusually, you know, large gap between July and September meetings and then if in fact you're sitting there on inflation watch the whole time, the bond market's getting, you know, uneasy further about that, it could force the Fed's hand, but then would that be a mistake if if the Fed were to move toward tightening now? >> My I mean I tried to not be normative, but if you if you my honest opinion is yeah, I wouldn't be hiking here. I think that wage growth is decelerated. I know we've had three straight months where the the the labor market looks a little bit better, but I think under the surface you're still getting negative revisions in in the housing market, which is the most responsive area of the of the economy to interest rate policy is in basically recession at this point in time. And so I don't think there's any real inflation pressure from the areas of the economy that the Fed can touch. So where are we getting inflation pressure? We we have a supply outage in the Middle East. It's just straightforward classic academic knowledge that you don't hike into a supply induced spike. So I don't think that's a good reason to to hike. And then you have the the AI build out. And I don't think a a hike or two is going to stop the CapEx plans of the hyperscalers. And so ultimately I know that's I think it would be a mistake. You're just going to depress these these responsive areas of the economy further. >> All that being said, you know, you still say overweight equities, still a bull market. This whole low correlation story, you know, the the the percentage of days where the index goes one way and the majority of stocks go the opposite direction. It feels like both the biggest story in the stock market and also one that it's like everybody's watching this pot. Is it really going to boil? I mean what what's the upside here? And it's just the market's way of of kind of resetting below the surface. >> Yeah, I think it is. You know, I think that the number one key here is well first let's step back and just realize the amount of damage that's under the surface. We've had the average S&P stock is down more than 18% from a 252-day one-year high. And so there is a real correction happening. I mean the the real exhibit A for that would be the semiconductor group, you know, even in the cap-weighted Nvidia-dominated group that's down like 13%. If you look at SMH or socks, it's down way more than that. And so, I think we have corrected a lot of that. And then we're going into earning season. And the big stat to me is like, yes, correlations are low. It's we're vulnerable to a macro risk because of that. But on the other hand, this really important semiconductor group enters this earning season with the highest um implied volatility that we've seen for any earning season outside of the GFC. To me, that's a really high hurdle for the bears to push this significantly lower. So, I like playing those odds. I think semis can get back into gear during earning season and uh reverse really this momentum rotation we've been playing uh since really like mid-June.