Asset managers see another 75-basis-point hike by Fed as inflation remains high

Asset managers concurred Tuesday that the Federal Reserve will hike interest rates by another 75 basis points to tamp down rising prices after the August consumer price index report came in higher than expected, suggesting equity markets will continue to come under pressure.

The Bureau of Labor Statistics reported on Tuesday that prices increased 8.3% from a year ago in August, compared with economists' expectations of an 8.1% rise, according to financial data firm FactSet Research Systems Inc.

Brian Nick, New York-based chief investment strategist at Nuveen, said the Fed will "find plenty of excuses" in this report to continue raising rates at a rapid clip. "A 75-basis-point hike next week is assured," he said. "The only question is whether there will be voices on the committee who want to hike by more."

Nuveen had about $1.1 trillion in assets under management as of June 30.

David Wagner, Fairhope, Ala.-based equity analyst and portfolio manager at Aptus Capital Advisors, said a rate hike of 75 basis points by the Fed at next week's meeting is "more of a certainty after today's report."

"This report does not increase confidence that inflation is trending down," he said. "This report will likely not pull longer-term Treasury yields lower, which is absolutely crucial for the equity markets to perform well in the near future, especially after the substantial increase in yields we've seen since early August."

Aptus has $3.6 billion in AUM.

Brad Conger, West Conshohocken, Pa.-based deputy chief investment officer at Hirtle Callaghan & Co., said the August CPI report "will have crushed any hopes that we were on a downward path for inflation."

The inference for the market, he added, should be that inflation is "not going to fade away smoothly."

"Inflation is infiltrating lots of spending categories at the same time in small degrees but persistently," he added. "I think we might be learning that inflation is like a tsunami with multiple waves rather than an isolated rogue wave."

Hirtle Callaghan has $20 billion in AUM.

Johan Grahn, Minneapolis-based vice president and head of ETF strategy at Allianz Investment Management, also said a 75-basis-point hike later this month is "more or less a sure thing."

"With a 75-basis-point hike, and a continued hard-line hawkish tone from the Fed, equity markets will have to accept the fact that economic growth will suffer, and reprice accordingly," Mr. Grahn added.

Allianz IM has $19.5 billion in AUM.

Andrew Slimmon, Chicago-based managing director and senior U.S. equity portfolio manager at Morgan Stanley Investment Management, said the CPI report was a "not-so-subtle reminder that inflation is stickier than what the optimists had hoped."

"For equities, stocks bottom in front of inflation peaking," he added. "And I think that has occurred. But it's a rocky recovery off those lows, and while I expect the market to end the year higher than where it is today, it's still going to be an underwhelming year for S&P 500 investors."

MSIM has AUM of $1.4 trillion.

"Within their fixed-income allocations, institutional investors tend to have large exposures to core markets, such as Treasuries, agencies, mortgages, and investment-grade corporates," said Mr. Persson of Nuveen. "Further Fed rate hikes, especially 'surprises' vs. market pricing, would likely weigh on these asset classes. We advocate a higher exposure to 'plus' sectors like high yield and loans, which have lower duration, are less exposed to higher rates and have outperformed in these types of environments, including this year so far."

Excluding the volatile food and energy sectors, the core consumer price index rose 6.3% year-over-year in August.

Still, the August consumer price index figure was lower than the 8.5% annual increase reported in July and the 9.1% annual jump recorded in June (which was the highest such annual increase since November 1981).

The August inflation picture was tempered by gasoline prices that plunged 10.6% in August from the prior month, but still climbed by 25.6% over the year-ago period, the report showed. However, food prices rose by 0.8% in August and have climbed 11.4% over the past 12 months.

"Even when you look at core CPI, which is likely more meaningful to the market and the Fed, it was still above expectations," Mr. Wagner added. "It's hard to find anything in this report that was meaningfully down… We're not seeing the pockets that should be cooling off, slowing down at all. So, from a momentum standpoint, we really aren't slowing down (inflation) as expected."

Mr. Nick also noted that "this is a bad report for basically all markets."

"For longer-term investors, a higher plateau for (interest) rates and more near-term market turmoil offers somewhat better entry points," he said. "We're looking at both public and private credit here, as well as municipal bonds, which are extremely rate sensitive but are offering better yields and more durable credit quality than they have for years."