Monthly Themes
- The labor market has softened – at equilibrium or on a cliff’s edge?
- Fiscal concerns remain in focus as the November 17 deadline looms.
- 10-year treasury yields rise sharply—a temporary high?
October data show us a decently-functioning economy, but one with numerous stressors that we expect will create further pressure on growth and could create an abrupt step down from the current decent conditions. A soft-landing scenario would require a great deal of luck to achieve.
The Labor Market: At Equilibrium or On a Cliff’s Edge?
Despite the healthy establishment payrolls increase of 336,000 in September, we see a softening, rather than a signal for the Fed to hike. First, the marginal number of people transitioning into or out of employment has reached pre-pandemic levels (Figure 1). These inflows have slowed over the last two years. The rate of people moving into employment is still healthy in absolute terms, but the metric is may be at a turning point as monetary policy remains tight and corporate profits weaken.
The Labor Market Has Softened but Still Remains Strong
Source: BLS, FRED, MIM
Second, we are concerned about the sharp divergence between the payrolls number and the household survey’s paltry 86,000 employment increase. That September reading was one of the weakest of the year, and a pronounced reversal from the prior three months’ consistent 200,000+ increases. Accounting for statistical errors and methodology differences between the two surveys, the “truth” of employment growth is probably somewhere in the middle.
Getting Our House in Order
Fiscal concerns remain high, and we expect them to remain on a short list of worries beyond any government funding resolution that happens in November. The current continuing resolution bill extends government funding to November 17. The lack of a House Speaker and the looming 2024 election year both add obstacles to the process and increase the risk of a shutdown in November. Additionally, credit rating agencies have been more focused on the processes surrounding budget approvals rather than relying solely on financials. As such, a government shutdown or continued difficulty in passing a budget could put the U.S. credit rating under further scrutiny, especially given ballooning debt and net interest payments (see Figure 2 below).1
Debt to GDP Expected To Surpass 100% By 2024
Source: Congressional Budget Office, MIM
As we discussed in our previous monthly, a government shutdown should not by itself cause a recession. However, the delaying of spending or furloughing of workers may put marginal pressure on consumer spending and government spending in the near-term for the length of the shutdown, adding to the list of economic uncertainties.
Rates ascendant
The 10-year treasury yield rose substantially in October, touching a high of 4.8% in the first week of the month. The increase has come almost entirely from real rates, as inflation expectations as seen in the 5-year, 5-year forward inflation expectations have increased only marginally. This appears to be partly due to adjusted expectations about how long the FOMC will maintain current Fed Funds levels and about how long quantitative tightening will last. We expect some of these impulses to fade toward year end as anticipated economic weakness comes to the foreground and inflation falls further. We also flag the changing structure of the yield curve. After a long period of inverted yield curves, we are seeing a steepening of the yield curve closer to positive. While inversions are commonly cited as leading indicators of a recession, in the last four recessions the yield curve normalized slightly before or coincident to the onset of the recession. If the pace of this shift continues as it has the last few months, the spread may be normalized by the first half of 2024, when we anticipate the recession will begin.
Yield Curve Normalization?
Source: Federal Reserve, Haver, NBER, and MIM
Risks to the Outlook
Our baseline outlook suggests a recession in the first quarter of 2024. Continued U.S. political disarray and the threat of turmoil in the Middle East with its potential effect on energy markets may provide further pressures on growth. There are at least two potentially mitigating factors. First, consumers continue to spend, with monthly spending growth for June, July, and August all equal to or above personal income growth. Consumer spending in services remains solid, and continued strength in spending would soften the landing, so to speak. Second, large increases in construction spending and investment, fueled by the infrastructure bills, may also continue to buoy the economy, and soften a recession, even if consumer spending falters.
U.S. Outlook Summary
Our outlook remains the same as last month. We expect that a recession will likely be avoided until 2024. The Fed has, in our view, completed its hiking cycle with its July rate hike. In 2024, we expect the Fed to begin a rate cut cycle, whether or not a recession takes place. We foresee a downward shift of the 10-year U.S. Treasury yield toward 4.00% by year-end 2023. We believe the downgrade to U.S. debt is unlikely to lead to an enduring rise in rates, although they are approaching cycle highs. We do not think credit markets have sufficiently priced in a hard landing scenario. Looking forward, we expect the credit cycle to turn in the coming quarters, with spreads widening further on continued recession risk. As a result, we prefer duration risks over credit risk.
Endnotes
1 Government shutdown: Could the U.S. implement austerity measures? (yahoo.com)
Download PDF
Disclaimer
This material is intended solely for Institutional Investors, Qualified Investors and Professional Investors. This analysis is not intended for distribution with Retail Investors. This document has been prepared by MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as of the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong. All investments involve risks including the potential for loss of principle and past performance does not guarantee similar future results. Property is a specialist sector that may be less liquid and produce more volatile performance than an investment in other investment sectors. The value of capital and income will fluctuate as property values and rental income rise and fall. The valuation of property is generally a matter of the valuers’ opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Furthermore, certain investments in mortgages, real estate or non-publicly traded securities and private debt instruments have a limited number of potential purchasers and sellers. This factor may have the effect of limiting the availability of these investments for purchase and may also limit the ability to sell such investments at their fair market value in response to changes in the economy or the financial markets. In the U.S. this document is communicated by MetLife Investment Management, LLC (MIM, LLC), a U.S. Securities Exchange Commission registered investment adviser. MIM, LLC is a subsidiary of MetLife, Inc. and part of MetLife Investment Management. Registration with the SEC does not imply a certain level of skill or that the SEC has endorsed the investment advisor. This document is being distributed by MetLife Investment Management Limited (“MIML”), authorised and regulated by the UK Financial Conduct Authority (FCA reference number 623761), registered address 1 Angel Lane, 8th Floor, London, EC4R 3AB, United Kingdom. This document is approved by MIML as a financial promotion for distribution in the UK. This document is only intended for, and may only be distributed to, investors in the UK and EEA who qualify as a “professional client” as defined under the Markets in Financial Instruments Directive (2014/65/EU), as implemented in the relevant EEA jurisdiction, and the retained EU law version of the same in the UK. For investors in the Middle East: This document is directed at and intended for institutional investors (as such term is defined in the various jurisdictions) only. The recipient of this document acknowledges that (1) no regulator or governmental authority in the Gulf Cooperation Council (“GCC”) or the Middle East has reviewed or approved this document or the substance contained within it, (2) this document is not for general circulation in the GCC or the Middle East and is provided on a confidential basis to the addressee only, (3) MetLife Investment Management is not licensed or regulated by any regulatory or governmental authority in the Middle East or the GCC, and (4) this document does not constitute or form part of any investment advice or solicitation of investment products in the GCC or Middle East or in any jurisdiction in which the provision of investment advice or any solicitation would be unlawful under the securities laws of such jurisdiction (and this document is therefore not construed as such). For investors in Japan: This document is being distributed by MetLife Asset Management Corp. (Japan) (“MAM”), 1-3 Kioicho, Chiyoda-ku, Tokyo 102-0094, Tokyo Garden Terrace KioiCho Kioi Tower 25F, a registered Financial Instruments Business Operator (“FIBO”) under the registration entry Director General of the Kanto Local Finance Bureau (FIBO) No. 2414. For Investors in Hong Kong S.A.R.: This document is being issued by MetLife Investments Asia Limited (“MIAL”), a part of MIM, and it has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”). MIAL is licensed by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. For investors in Australia: This information is distributed by MIM LLC and is intended for “wholesale clients” as defined in section 761G of the Corporations Act 2001 (Cth) (the Act). MIM LLC exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services it provides to Australian clients. MIM LLC is regulated by the SEC under US law, which is different from Australian law. MIMEL: For investors in the EEA, this document is being distributed by MetLife Investment Management Europe Limited (“MIMEL”), authorised and regulated by the Central Bank of Ireland (registered number: C451684), registered address 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. This document is approved by MIMEL as marketing communications for the purposes of the EU Directive 2014/65/EU on markets in financial instruments (“MiFID II”). Where MIMEL does not have an applicable cross-border licence, this document is only intended for, and may only be distributed on request to, investors in the EEA who qualify as a “professional client” as defined under MiFID II, as implemented in the relevant EEA jurisdiction. The investment strategies described herein are directly managed by delegate investment manager affiliates of MIMEL. Unless otherwise stated, none of the authors of this article, interviewees or referenced individuals are directly contracted with MIMEL or are regulated in Ireland. Unless otherwise stated, any industry awards referenced herein relate to the awards of affiliates of MIMEL and not to awards of MIMEL.
1 MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/ third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC, MetLife Investment Management Europe Limited, Affirmative Investment Management Partners Limited and Raven Capital Management LLC.