The recession debate remains front page news, bolstered mainly by the yield curve inversion of approximately -100 basis points between the 2yr and 10yr Treasury notes. Inverted yield curves have existed prior to every recession dating back to the 1950’s. So-called “no landing” advocates, meanwhile, point to Q2’s initial GDP read showing a better-than-expected +2.4% annualized rate of growth, along with the historically low level of unemployment here in the U.S., currently hovering around 3.6%. Only time, and the National Bureau of Economic Research, will tell if and when a recession has occurred.
Meanwhile, despite arguments that today’s low unemployment should forestall a decline in economic growth, history shows that U.S. recessions are typically preceded by very low unemployment figures. In the 1954 recession, unemployment surged from 2.6% to 6.0% in roughly one year’s time. In 1969, the jobless rate rose from just 3.5% to over 6.0% by 1971. The current U.S. JOLTS (Job Openings and Labor Turnover Survey) data for June showed a very robust 9.6 million job openings, high by historical measures. Conflicting signals remain prevalent across the economic landscape and for that reason, we remain neutral on the prospects for a near-term recession.
Inflation is still widespread in the economy, despite 525 basis points of interest rate hikes by the Federal Reserve. The PCE Core Deflator edged up +0.2% in June, or +4.1% YoY. Consumer prices ticked up +0.2% MoM as well, while PPI rose a mere +0.1%. This equates to +3.0% YoY for CPI and just +0.1% YoY for PPI. Back to the labor front, Average Hourly Earnings rose a higher than anticipated +0.4% in June, and remain up +4.4% YoY. It’s likely on the Fed’s radar as a sign of labor market strength, and will undoubtedly be monitored going forward as a measure of potential cooling off in the hiring space.
After taking a pause at their June meeting, the Federal Open Market Committee raised short-term rates by 25 bps in July. With no August meeting scheduled (although the Fed will be meeting in Jackson Hole, which has historically led to some economic volatility), the market is currently neutral on the odds for a September hike. Data dependent, as always, Fed Chair Powell will no doubt be monitoring the labor market closely, while also taking into consideration the broader price level here in the U.S. Markets are anticipating the Fed is at or near the end of its current hiking cycle, and if that were not the case, we will likely see much higher market volatility ahead.
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