Fed Cuts May Fall Short of Expectations, StoneX Expert Cautions

Key takeaways

• Inflation risks are rising due to various global factors, potentially catching markets off-guard
• Conditions may undermine sectors like utilities and benefit those like healthcare in 2025
• Federal Reserve likely to be less aggressive with rate cuts than market currently anticipates

StoneX Chief Market Strategist Kathryn Rooney Vera recently appeared on Yahoo Finance's Morning Brief to lay out the case for adopting a hedging strategy against potential reflation.

Responding to cohosts Seana Smith's recounting of the recent run up in crude - up 9% in recent weeks - and an increasingly stimulative posture by the PBOC (the Chinese central bank), Rooney Vera suggested a long commodities view could be a means to counter reflation risks. R

ooney Vera notes that with global monetary policy easing, the current growth story in the U.S. doesn't seem to be following the soft-landing scenario the market has been pricing in of late. “Ultimately," she noted, "inflation expectations do not correspond with the potential for a re-acceleration in inflation.” Rooney Vera drove the point home even further stating, "any conflagration in the Middle East and any potential closure of oil supply routes globally is effectively an inflation risk."

On the industrial and manufacturing front, Rooney Vera expressed measured optimism to cohost Brad Smith. "Industrials and manufacturing are likely to see an uptick from contraction to expansion if we avoid a recession here in the United States, which is ultimately my base case scenario," she said. She predicted that manufacturing could "crack expansionary territory over the next twelve months, of course, absent of recession here in the U.S."

Prompted by the Morning Brief crew, Rooney Vera recounted her preference of utilities for 2024. "Utilities was my top pick in terms of the S&P, and that was way out of consensus because this was the most battered and most unloved sector. Not sexy, kind of defensive historically," she noted, "but it's done very well, the top performing sector, up more than 30% year-to-date."

However, Rooney Vera believes the utilities outpacing has run its course. "I think it's over; I think it's done," she stated.

Looking ahead, she believed interest will rotate into another "under-loved, under-performing, also defensive" sector, identifying healthcare as a sector that could perform well in 2025.

Regarding the favored AI trade, Rooney Vera believes it has "reached a mature stage." She's now looking at "second derivative” views such as industrial real estate, which she sees as benefiting from AI's ongoing development and productivity improvements.

On the topic of Federal Reserve policy, and on the heels of last week's surprising-to-the-upside federal jobs report, Rooney Vera expects less aggressive rate cuts than the market is currently projecting. She explained, "If the economy does effectively avoid recession, which it seems poised to do with the US consumer being so robust... that to me says that the Fed is not going to slash rates. There's no need to do so."

Rooney Vera concluded by suggesting that markets are currently "repricing Fed cuts" and "repricing the possibility of inflation not hitting that 2% target anytime soon." She predicts the Fed may cut rates once more this year but likely less than the market currently expects next year.

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See the full interview with Kathryn Rooney Vera on Yahoo Finance here.

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