Macro view: hard landing ahead?
Ariel Bezalel and Harry Richards, investment managers of the Jupiter Strategic Bond strategy, outline their macro thesis and current view of markets.
![Ariel Bezalel Jupiter Head of Strategy, Fixed Income](https://www.jupiteram.com/uploads/2021/01/015edfe00a2a8922404f315346e9e366/ariel_bezalel_350x350.jpg?v=1640779736)
![Harry Richards Jupiter Fund Manager, Fixed Income](https://www.jupiteram.com/uploads/2021/01/bb8e646cd10641a4d315a85e430ad492/harry_richards_350x350.jpg?v=1706874644)
While the minutes from a recent FOMC meeting still speak of “proceeding” with current policy, the committee twice stresses that they must do so “carefully”. We would argue they should have been more careful before now.
Central banks, guided as they are by their main KPIs of managing inflation and unemployment, are having their policy action dictated by two of the most lagging indicators it is possible to find. It is the equivalent of driving a car while looking in the rear-view mirror. But if we look at the latest leading indicators to get a view of the road ahead, we can see a range of factors pointing towards recession.
Our macro thesis
-
Hard landing
for the US economy driven by monetary contraction and tighter lending standards. -
Recessionary forces
fuelled by depletion in household savings and slack in the job market. -
End of the tightening cycle
as the rolling over of growth and wages create room for central banks to act.
Consumer spending has been a key supportive factor in the last quarters as excess savings get re-absorbed into the economy, but (see chart below) savings buffers have now been depleted for the large majority of households. In such an environment, it is hard to see how consumer momentum can keep contributing to robust growth – especially with the resumption of student debt repayments in Q4.
Source: Federal Reserve, Bloomberg calculations, as at September 2023. Note: March 2020 = 100
While the job market remains strong on the surface, we are starting to see some change in trends. The unemployment rate continues to trend upwards, coming in higher than consensus for September at 3.8%. Similarly, the decrease in quit rates and the increase in permanent job losses signal some loosening in the jobs market, while trends in temporary employees and overtime hours point to additional slack ahead.
Furthermore, it seems that many market participants have stopped focusing on the state of the US banking system. As the chart below shows, there is still a chasm between deposit costs for commercial banks and the yields offered by simple money market instruments, with deposit uncertainty or lower profitability a very likely consequence. Recent trends in bank assets and commercial and industrial loans, now in contractionary territory, clearly show the consequences of tighter credit standards in action. This should be a further headwind for the broad economy and the job market moving forward.
Source: Bloomberg, as at 30.09.23
In such an environment, we think that the next 6 to 12 months should provide central banks across the globe with reasons (or perhaps the need) to be less hawkish. Developed markets central banks look still fairly data dependent, but looking at emerging markets we already see some rate cuts. Brazil and Chile already started their rate cutting cycle, as has Hungary. These are the same central banks that first started hiking two years ago and may be a good leading indicator for developed markets.
Finally, China is the elephant in the room. Although August data showed some improvement, the data remains sluggish. We do not believe that current support measures enacted by the government will prove sufficient to solve the structural imbalances within the housing market where 20-30% of GDP is from construction. Chinese property is the biggest asset class in the world. Piecemeal measures announced thus far are unlikely to have much long-lasting effect.
An enticing investment opportunity
An environment in which inflation rolls over, growth falters, and the employment picture worsens is one in which continued hawkish policy from the Federal Reserve will rapidly become untenable and cuts will follow. In our view this lays the foundation for an extremely promising investment environment for fixed income.
We have a high level of conviction in our macro view, but of course we know that nothing is guaranteed and there are factors which could de-rail the world from this path. The world is an unpredictable and volatile place, as we all see ample evidence of every day. Whatever fate throws at bond markets, however, the vast breadth of fixed income asset classes available means we have confidence that a flexible and dynamic global bond portfolio should have the tools at its disposal to meet that challenge. The investment opportunity in fixed income, as we see it, is an enticing one.
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