AFMC - Resilient U.S. Job Market Counters Recession Fears

2023-06-06 18:30:00 ET

Summary

• Why employment data is helping to push back the recession scenario.
• Strong jobs market means rates may not be coming down anytime soon.
• Why interest rate cuts may not happen until 2024 now.

The latest U.S. jobs data showed employment trends are still going strong, helping to push back against speculation of a looming recession. Justin Flowerday, Head of Public Equities at TD Asset Management, looks at the implications for interest rates and markets.

Transcript

Greg Bonnell: Recent strong economic data and signs of sticky inflation do have investors wondering if we're at the end of these rate hikes we've been seeing, or if central banks have a little more work ahead of them. Joining us now to discuss, Justin Flowerday, head of public equities at TD Asset Management. Justin, great to have you back on the show.

Justin Flowerday: Great to be here, Greg.

Greg Bonnell: This feels like it'll be the question of the summer, or maybe we'll start getting some answers in short order with our central bank on deck this week, the Fed a little bit later. But what are we seeing in terms of the data, and what are we thinking about rates?

Justin Flowerday: So we got some interesting data out from the US on Friday with the jobs report, and it was probably stronger than people anticipated. But there are a couple of caveats. The headline number -- they created 340,000 new jobs in the US, and so that was higher than anybody had estimated, so another really nice, strong jobs number.

On the other hand, they had unemployment rate, which actually went up to 3.7%. It's the result of a different survey that the Fed runs. The one that folks were really looking at, though, was average hourly earnings, and so that's an indication of wage inflation. And that came in up about 4.3%, which is a bit of a slowdown in the rate of wage gains there.

But for all intents and purposes, the US labor market remains very, very strong. We received the JOLTS report, which was out earlier in the week last week. The number of job openings employed per individuals looking to get hired is 1.8. That was up from the last month, so overall, very strong job environment in the US.

And it begs the question, what does the Fed do in June when they meet? Do they raise? Do they hold pat? And I think the way I'm approaching it right now is, we're likely to see a skip to the July meeting, and I would expect that in July, they would raise rates once again.

Greg Bonnell: So not even strong enough to call it a pause, a skip to hold it over until July. A lot has been said about it in terms of one-off data. It's like, OK, well, the central banks are looking for a trend line. Is the trend working in the direction that they want to see, or is there some concern that we're stalling out?

Justin Flowerday: So there's a couple of different things happening. You've got a really, really strong labor market and wage gains, which haven't shown the type of downward trend that the Fed would like to see. On the other hand, you're seeing continued slowdown in the ISM and terms of the manufacturing economy in the US. We saw ISM Services this morning, which came out, and there was also a little bit of weakness there.

So there's a couple of different things. What they need to do, though, is they need to crack the labor market, and they want to see, and they expect to see the unemployment rate continue to trend higher. It's just it's been stickier than they would have believed.

And they provide their outlook for economic forecasts when they meet, and they still expect the unemployment rate to end the year probably in the 4 and 1/2 range, which would be significantly higher from the start of the year, about a percent. And that would, in all the likelihood, result in a type of slowdown in the economy that would help them believe that inflation will not be sticky in the 4-plus percent range.

Greg Bonnell: Is this the story that the market's telling us? I mean, looking at the headlines out there, we get the S&P 500, that broader read of the American market, a fresh nine-month high. People are using terms like "bull market" or "dancing on the edge of a bull market." And yet we have these unresolved issues about inflation, about a strong labor market, about interest rate policy. How do we square all that out?

Justin Flowerday: Yeah, and it's a tough one. I mean, if you would have pressed pause last October when you had the S&P down kind of mid-20s percent, that would have been a really nice thing for the Fed because it tightens financial conditions, which is ultimately what they need to achieve in order to slow down the economy. But you get these cycles within cycles, and you saw a rally from that low.

And part of it was if you think about going into the fall, it was people had started to anticipate the recession. They had started to price in the recession. They had traded the recession, and the recession was still 12, 18 months in the future. People have a tendency to want to fast-forward to the end of the movie because they know what's happening, and in this case, it's too early. So we've had this cycle within a cycle.

And this is going to continue. I'd say the most recent data for me probably leads to a belief that the recession has been pushed out to 2024. It'd be very, very unique to see the type of jobs number you saw on Friday and then, in the next six months, the economy roll over very, very strongly.

Greg Bonnell: Does that mean that any potential rate cuts in that story has been pushed out until next year as well? Because the market has been changing its pricing lately, but where do you think we're headed?

Justin Flowerday: Yeah, that's right. And so, I mean, look, if you even look back three months ago, you would have seen an expectation for rate cuts in the summer, and we would not have been talking about a potential rate hike in June or July. And so that has started to move back.

And so there's a bit of a discrepancy in terms of the expectations for Fed rates that are priced into the market and what I believe. I don't think we're going to see a rate cut this year. I think that's been pushed into 2024.

And ultimately, I mean, we're going to remain data dependent, and we still have some inflation data to come out before the next meeting. We've got some other economic data that the Fed is watching very closely. Atlanta Fed Wage Tracker is coming out later this week. So we'll get a lot of data points that will help us develop a better picture of where we're heading.

Greg Bonnell: If we bring it back home, of course, our central bank has a decision this week before the Fed. We have seen some pretty strong economic data, and we've also seen inflation with signs of a bit of stickiness to it. We have been on pause, a full-on pause. There's a discussion now that perhaps is going to come off pause and raise again.

Justin Flowerday: Yeah, and I think we've seen stronger-than-expected overall employment growth, and we've seen a stronger economy than we would have anticipated. A lot of this has to do with just the overall aggregate demand in the Canadian economy that continues to grow on the back of our immigration and the fact that our base of consumers grows quarter after quarter by a significant amount, and so that's been a really nice tailwind for the Canadian economy.

Canada obviously was leading the way in terms of holding their rate hikes, and some would have thought they would be kind of cutting later in the year. I think, for now, we're probably in a similar boat, where we think they're going to hold steady where they are. I don't believe that they're going to be hiking on later this week, although they have enough data to support if they wanted to hike.

One of the things that the central banks both in Canada and the US don't want to do is they don't want to shock the market. They want to telegraph where they're going, and I think both central banks have done that fairly well. And so I would say that we'll probably see a pause from both Canada and the US just based on the things that we've heard coming out of the central bank in recent weeks.

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