Power Lunch - Inflation, the Beige Book and a 100bp rate hike? 07/13/22

Episode Date: July 13, 2022

The odds are rising that the Fed will hike rates by one percentage-point at its next meeting. Atlanta Fed President Raphael Bostic said everything is on the table. Plus, will oil prices spike before pulling back? And trading the strong dollar. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

See you in just a bit, Kelly. Welcome to Power Lunch. I'm Dominic Chewin for Tyler Matheson today, and here's what's ahead on the show. Inflation remains hot. Costs are surging for gasoline, groceries, and rent. We'll talk to an expert who says these high prices will not last. And another, who's buying dividend names to write out the volatility? We were watching some of those big names coming up. And the CEOs of Unity and Iron Source are here. The company's merging to create a gaming software. poor powerhouse. Iron source shares surging. Unity shares are falling. How they plan to compete in a very, very crowded field. Kelly, I'll send things over to the evening. Yeah, two power players, to be sure, Don Banks. Let's check on the markets. The Dow is down 466 points at the lows. We're only down 150. The tone has changed throughout the morning as investors have gone from worrying

about inflation and rate hikes to worrying more about recession and, well, rate hikes. The S&P down seven points. The NASDAQ is up four or five, so we'll keep an eye. on this one in particular. Those tech stocks have been getting a boost with Tesla up about 3%, Amazon and Nvidia up about one, one and a half percent. So here again, you're seeing a bit of the growthy feel playing out across the market. Let's take a look at Copper's intraday move. It's now higher after trading at its lowest level down there since November of 2020. So a huge reversal for copper into today's session, Dom. Now it's finally starting to level out a bit. All right, Kelly, well, that big part of the story today's inflation.

hitting a four-decade high last month, likely strengthening the Fed's case for an aggressive rate hike path going forward. The Consumer Price Index rose 9.1% from the same time last year. That's the largest gain since the end of 1981. Gasoline prices up 59.9% energy up overall, 41.6%. Food is up 10.4%. Shelter up 5.6%. But Will, can't. And these high prices last. Joining us now is David Donson. He's a business professor at Stanford University. A professor, maybe I would just ask this question simply.

It can't stay this way. How long do we have to wait before it starts calming down? Oh, I don't know. Maybe next week. I mean, all you do is have to walk down Main Street to see that the forces that were driving inflation are waning. You know, we have historic inflation, but we also had historic events. We had war in Ukraine, which is still going on. You know, Europe's largest natural gas provider is gone to war.

We had the flood fed flooding the system with cash and low interest money. And we're opening up our mailboxes to getting checks and we couldn't buy what we wanted to buy. So of course we had high inflation. But I think what we're seeing is over the last few months, a little bit of a pumping of the brakes. And I'm going to say something that might be a little bit controversial, which is I actually think this high inflation that we've experienced for a few months is a good thing.

Everybody's calming down a little bit. We can see that prices have come down, and those forces that we're driving high prices are all going away. So, no, I don't think there's any way that this high inflation is going to continue. So one second before we continue, actually, the Bejj book just released. If we may, let's get over to Steve Leasman, Steve, and get the details. What's it saying about the economy this time around? Overall, Kelly, it says the economy expanded at a modest pace, but that's not the whole story. It says that several districts reported signs of a slowdown.

Five districts say there is increased risk of recession. That's five, of course, of the 12 Federal Reserve Bank districts that are out there. I believe it was three last time, so it seems to be spreading a bit. Consumers spending moderated in most districts. Tourism and hospitality, however, remained healthy or were healthy, really standout sectors there in the economy. Many districts reported continue supply chain disruptions and labor shortages. Employment, however, rose at a modest attorney. moderate pace and the labor market was said to remain tight. There was some improvement in demand

for workers as there was some easing in the labor shortage out there in some areas, but there were substantial. I've never seen this phrase before. Substantial price increases reported across all districts. Pricing power was steady. Pricing pressure was expected to subsist and firms were successful in passing through price increases. So, A cooling economy with still hot inflation, I would say, is the takeaway from the beige book with maybe, maybe some improvement, Kelly, on the labor front, but really not much to write home about. All right. So, Steve, this is interesting here. So let's bring back David Dodson again.

You just heard Steve Leesman breaking down the Beige Book report. This is kind of what you were alluding to, right? This idea that with these high prices, they cannot be sustained because in the end of the day, they're going to slow down based upon what's happening with the economy. I wonder, though, the expectations component of what Steve just mentioned is curious to me. The expectations are what we have to remember that what we saw today. But just hold on one second. Hold on one second, professor. Hold on one second.

And the major book is indeed saying that we see some, you know, evidence of high prices. But the point is what are we seeing when we walk down Main Street? And when we walk down Main Street, we see that prices are coming down. Now, the big sort of question, I think, is what's going to happen in the labor markets. because if in fact you have these forces that are bringing prices down, which I think they will, but the labor market continues to fuel higher wages and we can pass through those costs, that's the one thing that could be scary and could lead to a wage price spiral, which I don't foresee, but I think that's possible.

But what about the expectations, though? The inflation expectations are what the Fed is trying to fight. What happens if we as consumers or as a nation start to just expect higher prices going forward? Isn't that a big danger as well? Absolutely. And that's really the thing that we need to focus on. But fortunately, there's data to suggest that most consumers don't expect this inflation to continue. And there's been constant polling for decades on what consumers think prices are going to be going forward. Now, you can look at that data and you can say, okay, well, clearly consumers do not think this 9% inflation is going to continue. But there's another question to ask yourself. Just look at how you and your neighbors are behaving. Is anybody rushing out and buying something today? because they think it's going to be significantly more expensive in October. The answer is no. So you can just look at day-to-day consumer behavior and see that people are saying,

you know what, I'm not going to buy that house today. I'm not going to buy that snowblower today. I'm not going to buy those things that target today, not because I think the prices are going to go up, but because I think prices are going to be either the same or going to be coming down. And by the way, we haven't even talked about the bloating inventories and the higher interest rates, which is going to force retailers to try to push through that inventory.

And the only way you're going to push through that inventory is dropping prices. So, you know, Ark Invest, Kathy Wood has made the point that deflation is going to be a bigger problem going forward. And we're already maybe starting to see some commentary coming out. It seems weird to talk about that at a time when inflation is running at the fastest pace in 41 years. But which is going to be worse, Professor, in your mind? Is it the inflation that we have right now or the threat of deflation going forward? I think that what's happened now, what we've seen in the past is it's pumping. of the breaks, as I've said, which is slowing down the economy, I think the idea that because

we've had bad inflation that necessarily implies bad policy or that we're in trouble is wrong. I think what we've had is a cooling down on the economy. If there's some deflation that happens over the next six months, I don't think that's going to be detrimental to the economy at all. But I don't think that's what's going to happen. I think what's going to happen is we're going to have a cooling down of the economy. Remember, we have been spoiled with zero interest rates, open up your mailbox and there's checks to spend money on. We've been a successful spoiled economy right now, we're actually sort of moving back into pre-COVID days where we have normal interest rates, we have normal GDP, and everything's settling down. That's my view.

Let me bring Steve Leesman back, Steve, as we see the markets moving in reaction to what may be some headlines from the fed's Raphael Bostick, who just appeared to not rule out the possibility of a full point rate hike at the meeting this month. What can you tell us? You know, it's on the table, Kelly. Let me just look at the percentage here. It has, oh, wow, it just jumped. Okay, so let me give you the towel of the tape. It was 3% this morning, the probability of 100 basis point hike.

It was 38% at the highest level after the CPI. It is now trading, Kelly, at a 54% probability. I guess I've never seen this before, that there is now a majority or a more than half, more than 50% probability chance of a 100 basis point height coming up in just what about two weeks from now. So what Bostick said is resonating in the markets. I think the base book right here with these substantial price increases. The problem in what David is saying is all of that may be true, but there's a pretty severe timing issue, which is that what this basebook suggests is you do have the cooling in the economy. You do have a consumer that's saying, I can't do all the things I did

before, and yet you still have the phrase in there, David, that says substantial price increases throughout the economy across all districts. I think you probably will end up being right, but the question is, do you end up being right before the Fed goes full bore on 100 basis points this time? And let me see what the probability is. It's a 64% probability of a 75. So, wow, these members have really moved up, guys. 175 basis points, more or less price. in between now and the September meeting. Okay, so let's kind of give the last word to you, Professor Dodson. You've heard Steve, the probabilities are laying out there.

What exactly is the Fed's next step here? If they are already seeing by their own beige book some of the evidence that there's an economic slowdown in a number of districts, a growing number of districts, do they have a case to keep raising rates by 75 or perhaps hypothetically, a hundred base? basis points at a clip? Oh, I think they absolutely have a case to raise its 75 basis points. They've been basically saying for a long time that that's what they're going to do. If they go more than 75 basis points, what they're saying is that they've been shocked

by the numbers, and they're surprised by the numbers, and they have to take more drastic action. I don't think that's indicated here. I don't think you need to do that to cool the economy, and I think that would be a mistake, because that would be saying to the economy, things are still out of control. We don't have control of the economy. What I'd like to see the Fed come back and say, we have to say, we have a mistake. control of the economy. What we're doing is working. The forces that we put to play on the

liquidity in the system and the interest rates are having exactly the effect that we want, so everybody needs to relax, and we're going to return back to normality, which I think is absolutely going to be the case with the one exception or two exceptions. One is the labor markets could get overheated, and the second is you could have some strange event that happens in the European winter, which drives energy prices up. The question also becomes, what is normality these days? Professor at Stanford, thank you very much. And of course, our own Steve Leesman breaking down all those numbers for us. We appreciate it, gentlemen.

Some pretty significant developments. We should mention the Dow's down about 226 points, so lower than we were top of the hour, but still nowhere near the session lows. And inflation is one of the reasons why strategists say this will be one of the strangest earnings season in years. And it kicks off basically tomorrow morning. Analysts have been slow to lower their estimates to figure out the impact of rising prices and what's happening with growth. Let's get down to Bob Bassani at the New York Stock Exchange. Bob? Kelly, you're having a strange earnings season because we're getting a real distortion in some of the earnings picture.

Let me just show you. The real issue here is the tremendous profits oil companies have been making. So right now for the second quarter, we're expecting earnings growth of 5.7%. Okay, fair enough. But much of this is due to the fact that energy companies are gushing profits. If you remove energy from the S&P 500 equation, it's actually down. Earnings estimates are down 3% for the second quarter. How about some bright spots?

Well, other than energy, which is expected to see a profit increase of 239%. That is not a typo there. The other big profit areas, airlines are having a great time. Of course, you heard about those higher prices at Bastion on this morning. Their revenues were higher than anticipated. So they're going to be a big winner. Interestingly, pharmaceuticals are having very good numbers also. They're going to be up about 20%.

This is in terms of earnings increases. And stocks like Merck and Pfizer have reflected that better outlook. How about some trouble spots that are out there? Well, let's look at some of the big cap stocks, the top five or so that are out there. You see, Microsoft is fine. They're actually going to be up. Alphabet's okay. Apple, a modest decline.

Here's two big problems for the market. Meta and Amazon, simply disastrous quarters. Their estimates are way down, and their stocks are reflecting that kind of performance. Meta is so big that it's a major drag on the communication services sector. Amazon is so big, it has been a major drag on the consumer discretionary sector. And that's one of the reasons consumer discretionary has had the worst performance of the year. How about another potential weak spot? Believe it or not, banks, it's not necessarily on the fundamentals.

Loan growth is strong here. But look at that, financials, which is mostly the banks, expected to be down 20% year over year. This is the weakest sector in the S&P 500 in terms of profit growth or profit declines here. Big issue here is higher provisions for loan losses potentially out there. And guys, we'll be expecting J.P. Morgan's Jamie Diamond to talk about that. particularly tomorrow. So the big story here, pretty simple here, Dom. Everyone is expecting the CEOs to adopt very cautious positions because of uncertainty on inflation, and they're anticipating the analysts are going to start moving the estimates down.

We'll see right now it's still very much a coin toss. Back to you. You can't really go out on a limb this earning season. If you're a CEO, you're being given a lot of cover, I guess, these days, Bob, for you to kind of make those conservative commentary points. Bob Bassani at the Stock Exchange. Thank you very much. We've got more on June's hot inflation report coming up later on in the show. The nearly 60% rise in gasoline prices in June is putting pressure on President Biden to get a deal done with Gulf oil producers during his Middle East trip. But there's another high-level meeting taking place that could have an even bigger impact

on the price of oil. We'll have that coming up. Plus, the euro hits parity with the U.S. dollar for the first time in two decades. We'll trade some of the stocks with the biggest exposure to that euro dollar trade. three-stock lunch. And here's a look at the Dow, which is down about 200 points right now or so, heading back towards those lows of the sessions. You can see still well off the worst levels just after the opening bell. We'll be back after this break. Welcome back to Power Lunch, everybody. President Biden kicks off his Middle East trip today. The president in Israel,

then he heads to Saudi Arabia later in the week. It's all part of an effort to curb gasoline prices with oil remaining stubbornly high. There's tons of demand, low inventory, and a continuing war for Ukraine. Bob McNally is founder and president of Rapid End Energy Group. He's also a former energy advisor to President George W. Bush. We were just talking about this, Bob in the break, actually, that you do have a lot of things in the market moving in a positive way coming off the boil for the inflation trade. What happens if the president comes back from Saudi Arabia and oil prices start to rise again because they're not pleased enough by whatever the result is that they're expecting? Well, the president's pain is going to go back up.

He brushed off today's inflation number saying, oh, it hasn't caught enough with gasoline prices, which have fallen in the last month, as they have. But, you know, gasoline prices are only going to follow crude. And we, like many, I think, expect we're probably going to have one more rally in crude. I think the market was too complacent about recession risks up until a few weeks ago. Now it's probably overdoing it. And whatever President Trump Biden does in the Middle East doesn't really matter, honestly. Really? Saudi Arabia and UAE, they only have less than two million.

barrels a day of spare. They've already pretty much said, we gave you last month our concession. We accelerated tapering. We're done in August instead of September. We're going to keep our spare production capacity dry in case we have a problem later this year. I think President Biden's okay with that. So I think it's kind of a nothing burger a little bit in terms of new surprise. Let me ask you this. You know, it still seems like even if we got a recession, would it be enough to, you know, have global demand decline by more than that amount? I mean, you're sort of saying the supply side here is not as big a deal as the slowing in demand, but is the slowing in demand actually going to be enough to make a difference? The price will rise to whatever levels needed

to slow demand. All booms like this end in recession. When the supply side is tapped out and it is upstream, it is downstream. The only way it ends, it's always the case, is with a recession and demand deceleration. So whether we've seen enough, it's not so clear. In the United States, the consumer is capitulating. There's an awful demand data we're seeing now in gasoline and diesel especially, but around the world, not so bad. India doing quite well, China coming back. So we don't think we've imposed enough pain yet, but this will end with demand being sort of a hammered down by higher prices. The question is whether we've done enough damage already with these prices or do we have to go higher. Exactly, because I think back, I think it was around 2012,

2013 with the Libya incident. Oil prices were around $100 a barrel then, and there was no major economic fallout. There was no major price spike. I don't even remember there being significant demand destruction, honestly. So, you know, we could be at a relatively high, boringly, unfortunately, high price for some time. Or do you, are you saying that we have to get to some kind of blow off top that we haven't reached yet? I think we probably have to go a little higher. And what's different between now and say 2012 or from 03 to 08 when prices quintupled nearly, yet a miss growth until the very end is gas, is product cracks are much wider. So you have these $45 per barrel spread or crack between the gasoline and diesel and crude oil. Normally, that's $10 or $10 a $10 with a $45

crack is a bigger problem than if the crack were lower. So net net, I think, though, we probably need one more rally, I think, into the third quarter. We're probably going to get it. You mentioned there are supply disruptions. Half of Libya has gone out. Things are not going well with Iran. Refinery runs are increasing this summer. Demand, again, outside the United States is doing pretty well. So the ingredients are there probably for maybe one more run-up, back up to $120 Brent or so with a $45 crack. We're into the high $100 range for products. That's probably enough. And then we go down. Bob, it's Tom. How much is the Russia-Ukraine war affecting that demand supply dynamic and pricing dynamic when it comes to consumers like China and India?

They are big consumers and they are probably buying Russian oil right now. At a discount, discount. Yeah, and they certainly are. You know, it's been a, it's been a perception issue in a way, a head fake. When this first started, everybody thought we're going to be down three million barrels a day in Russia by this summer. And that's why crude oil prices roofed over $130 a barrel. But as we see, Russia has been very resilient. Their production and exports are being quite strong. Putin's making more money now. So in terms of directly affecting the supply of oil, we've seen some rearranging of flows, a lot more going from Russia to India and China, a lot less to the United States and Europe and the Middle East, some rearranging, but not a big hit yet. The issue,

though, is what's coming. This EU embargo is serious. They take half of Russia's oil, its law, it's going to go into effect. So in a way, the bigger issue is what's going on in Asia with Secretary Yellen. Is she going to try and dampen this prospective loss of up to three million barrels a day of Russian supplied by this price cap mechanism? I think it's to be seen. That's really, The real impact of Russia fundamentally is still to come. All right, in the months ahead. Bob McNally, thank you very much. We appreciate it, sir.

You bet. Coming up on the show, a multiplayer merger. We're talking video game software. Developer Unity merging with mobile app software maker Iron Source in a massive $4.4 billion stock swap deal. What this means for the video game business that's coming up next. Welcome back, a multiplayer merger in the video game industry. Video game software developer Unity is merging with the mobile app software,

maker Iron Source and a $4.4 billion deal. Now, Unity shares are down 17 and a half percent. Despite being a key player in gaming in the Metaverse, they've been struggling all year, down 77 percent just since January. For more, let's bring in Steve Kovac. He has the CEO of Unity. John Richottiello, welcome to you both. Steve kicked things off for us. Yeah, and John, thank you so much for joining us right off this merger. Let's just jump right into it. Unity shares are falling on this news, in part maybe due to the announcement, in part maybe due to to the lowered guidance. Why don't you talk us through what investors are missing today,

and why you chose Iron Swords for this acquisition? Look, I think combining unity with Iron Source creates an incredible opportunity. At one level, we're going to be able to help developers, whether they're digital twin developers or their gaming developers, build better products, basically bringing more data from consumers into the creation process. And then also bring the creation into the user acquisition process to ensure that they get the right best quality user acquisition so they can optimize their business. And then secondarily, aside for that sort of long-term crisp vision for how this is a winner, there's some amazing near-term synergies that we think are durable. They'll last a long time, but they're going to come immediately or very closely following the acquisition.

One is around, you know, the ad network part of this, very crisply. It's a business where more data means more performance for advertisers and more performance for advertisers is good for us, you know, it's a rev share business. You know, secondly, they bring a mediation tool, a leading mediation tool. That's an important part of a full stack network. And it's a great product. And again, we will bring more data to it, bringing more advantage. And then lastly, I can get into this supersonic thing, but supersonic's a tool they have.

We can integrate it into our editor. And what that enables is that long tail, that developer that's looking to build a business and they're creative, but they don't have the resources for user acquisition or to mount a campaign or the specification for it in really enabling them to find success quickly. So my sense is this is one of those deals where it'll take a while for people to figure it out. My job is to make sure we're doing the right things in the long. long term. And but in this case, short term and long term, we're going to, we're going to deliver. Yeah. And speaking in the shorter term, John, you did lower your guidance this morning along

with this announcement. You cited some macroeconomic factors, but can you be more specific on what those factors are and what you're seeing through the end of the year that caused you to think you need to lower your guidance? Steve, I wish I could answer that question. But guys like me in situations where we provided a certain amount of information for investors earlier today in a public disclosure can't really go further. But we work crisp and clear in what we're seeing. And we've got our earnings call in August, and we explained that we'll provide further information at that point. But one of the hallmarks of Unity and, you know, Luis, our amazing CFO is just total transparency. We wanted to get out there. So investors could make an informed decision not to

not to have anything held back. And so we provided that today as part of our merger messenger. John, it's Kelly. If I could just follow up here with the stock falling today the way it is, you mentioned that, you know, people need to give you some time to demonstrate what the value of this deal is. Why isn't it immediately apparent? And is it because you want data to unlock advertising potential, as you mentioned a moment ago, that they just need to understand or see that line of thinking better?

Well, look, I think they, first time, albeit for me to second guess the market, the market was down overall, I don't think we caused that. You know, bad jokes aside. You know, my sense is, you know, we were, you know, news sometimes that it's not incredibly simple in the near term in this market for tech stocks, move things around in unpredictable ways. We're prepared for that.

What we are convinced of is as we bring these two companies together, the upside is incredibly clear. and we provided benchmark guidance today for being at an $800 million EBIT dollar run rate by the end of 2024. That's a big number for any company that's growing as rapidly as we are at this scale. In my sense is as people study this and they understand it, they too will believe it. And when they believe it, you know, typically good things happen with stocks. But again, I'm not a day-to-day stock picker.

I can't tell you when it's going to go up or when it's going to go down. Yeah, absolutely. As we mentioned, Steve, thanks. So, our John, thanks for coming on today, giving us some more color and clarity around that and what you think is happening with the macro. And Steve, thanks for bringing that to us. We appreciate it. Thanks, guys. Our Steve Kovac. Let's get to Leslie Picker now for the CNBC News Update. Leslie. Hey, Cal, a record decline for the federal government's budget deficit about 30 minutes ago. The Treasury Department reported the red ink for the fiscal year to date that's last October through June, dropped by 1.7. trillion dollars from the same period last year. That's a 77% plunge thanks to higher receipts and lower spending. The Biden administration is warning today that refusing to fill a prescription for a drug that could be used to end a pregnancy may be a violation of federal discrimination laws. The Department of Health and Human Services says that includes emergency contraceptives and drugs

for medication abortions. A judge is rejecting Amber Heard's motion to have the $10 million judgment against her set aside or have the trial thrown out altogether. Her lawyers argue there were several problems, including an apparent case of mistaken identity with one of the jurors. Herd can still appeal the verdict to Virginia's Court of Appeals. And Bill Gates is donating another $20 billion to his foundation so it can increase its annual spending by 50 percent to $9 billion by 2026. He tells Forbes he expects he and his former wife, Melinda French, will be running. the foundation together forever. Back to you guys. I guess it's kind of romantic. I don't know. You could look at it kind of that way, I guess. $20 billion, does $20 billion by you romance?

I don't know. Perspective, I guess. Yeah. Can't buy me love, I guess. Good for the world. I don't know. All right. Leslie Picker, thank you very much for that. Ahead on the show here. Top dollar. Ways to trade the strong dollar in today's three stock lunch coming up. Plus bank on earnings. See what I did there? What to expect from the financials, ahead of key results and what the numbers could tell us about the state of not just the U.S., but maybe the world economy. And a means to a dividend, even amid volatile companies paying out big yields. We'll get some top picks next, and the puns will end soon, Kelly.

Power lunch will be right back after this. They will never end. No. We've got a little under 90 minutes left in the trading day so far, and we want to get you caught up on what's happening with the markets. It's been a story. Stocks, bonds, commodities, you name it, and a look at some of the best dividend plays in the market right now. Stocks are mixed at this hour with the NASDAQ, the only major index in the green. The Dow was off at session lows.

By the way, it was down 466 points at the lows of the session. Consumer discretionary and energy are the best performing sectors in the S&P right now. You've got industrials, communication services, financials, and health care among the big laggards. Now let's move along to the bond market. Where the yield curve is inverting following the latest beige book results from the Fed, Rick Santelli is tracking the action. And Rick, how much more is the bond market? telling us about the likelihood of a possible recession.

Oh, I think the bond market isn't telling us quite that much, but the Fed Fund futures markets are, and we'll get to that in a moment. It's a long story today, and we could tell it all in four charts. Look at an intraday of 10-year note yields. At 8.30 Eastern, it popped. Those were hot, hot, hot CPI numbers. But the minute it didn't hold 3%, it dropped. And if you look at an intraday of 30-year bonds, well, what happened there was at 1 o'clock

Eastern, we had an auction. And boy, investors, they might have looked at today's inflation data, scratch their head and said, I think around 3.5% is going to be the terminal rate. I like the fact that the Bank of Canada won 100 and maybe the Fed will be bigger because the more they do now, the better off the market's going to like it. And boy, they really bought that longest maturity on the Treasury curve, especially foreign interest. Now, if we look at the curve, as you were just discussing, Dom, there's twos to tens. Right now, it's minus 22 and a half. I have to adjust my vocabulary. I've been

telling people it's going to be the flattest clothes in 22 years, but that's not grammatically correct. It's the most inverted close in 22 years. That is huge. And the amount it's covered just in the last four sessions is really huge. And finally, Fed Fund Futures contracts are making contract lows. This is December of 22. The new contract lows mean the most aggressive Fed being priced in, and I think that really is a good thing to try to get the pain and the Band-Aid ripped off as soon as possible. Dom, back to you. A resetting of expectations given those comments today. Thank you very much, Rick Santelli for the bond report. Oil is closing for this the day right now, seeing a slight rebound, at least from yesterday's drop, but still well below the

$100 mark. Pippa Stevens has the numbers. Pippa. Hey, Dom, while oil's been all over the place today in a volatile session, closing here, slightly higher, Brent crude approaching that $100 level with WTI right around 96.23. Now, we did get the latest read on the market from the International Energy Agency today, which said that, quote, higher prices and a deteriorating economic environment have started to take their toll on demand. Larger than expected supply, from Russia is also easing some of the tight market conditions. But Chevron's CEO Michael Worth is among those warning that the relief might be short-lived. Here's what he said earlier today at CNBC's Evolve Global Summit.

I think it's good for the economy that prices have moderated, but I also see the risks remaining skewed towards the upside. It's to several factors that could push prices higher, including a demand rebound when China fully reopens, as well as ongoing sanctions as nation's. look to move away from Russian energy. Finally, take a look at Nat gas on the move again, up more than 8% dumb, as higher temperatures boost cooling demand. Back to you.

All right, thank you very much. Pippa Stevens for the energy report. As we mentioned yesterday, dividend payouts hit a record last quarter with companies paying out billions of dollars, but not all dividend payers are created equal. So how do you decide which names are buys and which ones are holds or sells? Let's bring in Mike LaBelle, a senior portfolio manager at Franklin Templeton Investment Solutions. Mike, which ones? What sectors are the best dividend payers? Where would you go in this environment? Sure. The inflation report today is just another indication that the Fed is going to continue being aggressive.

That increases the risk of a policy error. So the type of dividend payers you want to go into are in the more defensive sectors of the economy that aren't going to be able to, that are going to be able to withstand more of a slow economic slowdown. Things like beverages like PepsiCo, healthcare, Johnson & Johnson, utility, American electric power. These are areas in the market that have higher than expected dividends, so about 20% higher than the S&P 500. They're in more stable industries. So the idea is that they're going to be less impacted by any potential economic slowdown. And most importantly, their volatility profile is extremely low. So all the big drawdowns we've had this year, these type of stop characteristics have held up significantly better than the market as a whole. And how about the energy trade? We know that a lot of those dividend

payouts have been kind of patted tailwind because of the equity capital market side of things for these companies. The stock prices are on the rise. Are those dividends still safe? Do you like them? Do you want to put money into energy dividend payers? So we went into this year, actually, with almost no exposure to energy stocks within our dividend portfolio. And the reason for that was because of the poor earnings profile. Now, that has changed dramatically. And energy as a sector looks much more sustainable as it relates to those underlying components. But the idea here is that people think you can only chase for yield within the energy sector. And the fact of the matter is, is there's broad sector alignment that

you can get in that diversifies that dividend impact that is not solely reliant on the price of oil. All right. Michael LeBella, Franklin Templeton, thank you very much for those dividend and praise plays. We appreciate it. Thanks, having me. Coming up, it's like he had a crystal ball. An hour before the release of the beige book, Nomura changed its call to 100 basis point jump in July. This was before Bostick left it on the table. Remember, markets after those remarks, now just following along. We'll speak to the economist behind this call right after this break. Welcome back to Power Lunch, everybody. A big Fed call by Nomura. The firm now expects the Fed to hike rates by a full point, 100 basis points, at its next meeting in two weeks. This call came

after the inflation data this morning. But before the Fed's Rafael Bostick left open that very possibility in remarks this afternoon, that said. the markets to price in the chance of a full point hike for the first time, as Steve Leasman reported at the top of the hour. Markets, interestingly, recovering. Dow's only down 69 points right now. Let's bring in Robert Dent. He's Nomura's senior U.S. economist. Robert, it's great to see you. And even though the CPI was hotter than expected, a lot of the inflation expectations numbers look better over the last couple of weeks. So why do you think the Fed would go ahead and increase the size of rate hikes now? So we think the Fed has been pretty much unequivocal that they are kind of

hyper data dependent right now. Powell told us at the June meeting when he was asked about 100 basis points, you know, they're going to be watching the data and they will react appropriately. We think this morning's report underscored just very broad inflationary pressures really across the economy. I think for us, what we paid the most attention to was rent inflation in particular, which is very correlated with these trend inflation measures like trimmed mean. Those picked up even more than we expected and we've had a pretty aggressive rent inflation forecast for a while. With inflation expectations, you know, market implied measures have come off. But I think if you look at consumer inflation expectations, they have arguably gotten much worse. The distribution of consumer inflation expectations, particularly for the long term, has flattened out quite a bit. I think the Fed is paying more attention to that. They are becoming more concerned about how well anchored they really are. And that adds kind of a new dimension to the Fed's reaction function. I think you bake all of that together. It's not very hard for them to go to 100 basis points in July after hiking by 75. basis points in June. So, Dom, it's Robert here. Is that expectations component, the main reason why?

Because we spoke to Stanford, Professor David Dobson, about this at the beginning of the show, how much of that expectations or this notion that consumers of the public will be kind of anchored to a higher general level of inflation? And that's dangerous for the economy. How much of that is factory into looking at backward-looking data like the CPI and PPI and still going ahead with 100 basis point rise this coming two weeks? You know, it is a little bit backward looking, but to be completely frank, I don't think the Fed has much confidence in their forecasting ability for inflation right now, just given how uncertain everything is. That means they're going to be reacting to data by data month by month.

You know, as things come in, they're going to kind of determine appropriate policy. You know, I do think the consumer inflation expectation story is complicated, right? We know that consumers respond to higher gas prices, higher food prices. Maybe those things will come off. But right now, I think the risk that the Fed is. faces is that this inflation problem, which is mainly a cyclical story, right? Right now, it's mainly about rent. It's mainly about overheating labor markets becomes a much more structural story, right? Consumers start to expect 8% inflation for the next five to 10 years. They start to negotiate wages

based on that. And then firms start to raise prices based on the wages they need to pay. And so that's really the risk that I think the Fed is staring at right now. And I think that's what helps justify, you know, stepping up the pace of rate increases. I thought Dave Zervos also made an interesting point last hour, Robert, when he said that Europe is a little bit hamstrung right now. Obviously, the Bank of Canada this morning hiked by a full point, but it would help if Europe could be more hawkish to try to kind of get at the global demand supply imbalance. Can you just comment quickly on how much of the heavy lifting we have to do and how our inflation fight is situated relative to the rest of the world?

I do think the U.S. inflation situation is a little bit unique just in terms of how broad these pressures are, right? We are really concerned about nominal wage growth, about rent inflation, about service inflation in the U.S. It's really no longer a story of supply chain imbalances. It is becoming a more structural issue that I think requires a stronger response from the Fed. For Europe, our economists tend to think it's a little bit more related to food and energy specifically. And so you could imagine that the amount of policy tightening required might be a little bit less compared to what the Fed needs to do. Maybe they don't need to hold rates at a restrictive level quite as long as we're expecting the Fed to do. But we ultimately think because of how

entrenched inflation really is. And I think this morning CPI report is a great example of that. It is going to require a disproportionately larger response from the Fed in the U.S. All right. And there you are with the bold call. Robert, thanks for joining us on such short notice today. Thanks for having me. Robert Dent is Numeros senior U.S. economist. All right, strong dollar medicine, which names could add to your portfolio. to offset the strong U.S. dollar impact that's coming up next in our three-stock lunch, one of which is a cocktail maker. Welcome back. Time to today's three-stock lunch with the euro-reaching parity against the U.S. dollar

for the first time in around two decades. We are trading some consumer staple stocks that are most exposed to the dollar moves, Denon, Diageo, and Mondalese. Let's bring in CNBC contributor Boris Schlossberg, managing director of FX Strategy at BK Asset Management. Boris, it's always great to see and get your thoughts. You've got a global view on this. Let's start with Danone. I know them for yogurt, but it's a European company.

Not a lot of exposure here for the stock. Buy or sell? Buy, because in this kind of situation, you basically want to be long companies that source their product in euros and sell in dollars, which is the classic case of Donon at this point, because obviously most of its operations are in Europe,

but it has a very, very large North American presence. And it's trying to expand and improve its operations here. So to me, it's a little bit of a sleeper stock, but I think should really benefit from positive effects exposure and has a 3.75 yield. Very, very nice and attractive trade at this point, in my opinion. All right, nice and clear take on that one. What about Diageo, Boris? I love Diageo. I know it's a little bit expensive, although it's far less expensive than it was a couple of months ago.

Diageo is another one of those companies that has sourcing in pounds and euros, because it owns Guinness, TAC, Gray, Johnny Walker, great brands, and obviously 50,000. Obviously, 55% of its sales in a North American segment, where, by the way, spirits continue to grow. And I think that's going to be a very, very strong stock, really not just for now, but for the long haul. But in the meantime, really gets a nice bump from positive effects exposure, in my opinion. Premium spirits has been a trend that might continue during or after the pandemic as well. Okay, so the last one here is a consumer staples names that many of us know here in the U.S. They make a lot of products we know.

It's Mondalese. What do we think about that dollar story exposure there? Well, here it's the problem in reverse because a lot of the sourcing is in dollars, but almost 40% of their sales are to Europe and 30% to Latin America and Middle East and North Africa. Those are going to be very troubled regions, in my opinion. The consumer in those regions is far worse shape than the American consumer. Labor markets there are much worse. Real wages are going down, and they're starting to see a decline because these are all discretionary goods.

I mean, you're just not going to buy chocolate if your last dollar has to go towards just spending real food. So I think Mondelez is going to possibly surprise to the downside. To me, this is one I would step away from. It's trading at the lower end of its range, and it could break the lows as a result of negative FX exposure, in my opinion. All right, dollar plays, Boris Schlossberg and three-stock lunch. That's a buy for Danone, a buy for Diageo, and a sell for Mondelees. Thank you very much. We'll see you soon.

Thanks a lot. Coming up next on the show, looking to the ETF markets for signs that inflation may be rolling over. And take a look at the Netflix shares right now. they are moving higher following news that the company has chosen Microsoft as its partner for its new ad-supported subscription plan. Those Netflix and Microsoft shares on the move right now. We'll keep an eye on those. Keep it right here. We'll be back after the break. All right. So we started off the show, Kelly, talking a little bit about the inflation narrative that's been going on right now, the hottest CPI print in 41 years, and maybe what the expectations

are going forward, not just for consumers, but for investors. Yeah. Well, we thought we do it through the lens of ETFs because investors, arguably, and traders, have been pricing in a lower inflation environment over the past several weeks, if not months. I'm going to show you three charts. First of all is the spider gold ETF. Traditionally, and you can argue whether or not it really is an inflation hedge, correlations and whatnot, but look at that peak that you're seeing just kind of over in the February May level. These dates are going to be important. Right. No coincidence. And right. And then you kind of see this rollover effect of what's happening with gold prices, a traditional inflation hedge. Another traditional inflation hedge has been real estate. Now,

interest rates play a part of that discussion as well, right? If you take a look at the interest rate environment, the Vanguard real estate ETF tracks that real estate market. And even since then, since arguably December, we've seen a rollover of some of those prices as well, a real asset, a hedge for inflation. And then one last one, Kelly, before I let you kind of take a look at what we see overall, is the Investco-Deutsche Bank Agriculture ETF, measures those soft commodities, wheat, corn, grains, and again, April, May, that rollover effect that we're seeing right there. So have the markets already expected that inflationary narrative to roll over? And you have Anneta Markowska at Jeffrey saying she doesn't expect a full point hike later this month

because inflation expectations have really rolled over as well. Here's the 10-year break-evens. We're back to two and a quarter. That's pretty close to target. It's a lot better than it was a month ago. I mean, just to think about this idea that the markets are pricing this in real-time is something kind of useful. and wondrous to behold.

We'll leave it on that note. Dom, thanks for being here. Thanks for watching, Power Lunch, everybody. Closing bell with Sarah Eisen starts right.