Wall Street is turning sour on the US economic outlook, with private payroll data coming in below forecasts and red flags appearing in the market for US Treasury bonds.
Private payrolls grew by 89,000 jobs in September, according to the latest ADP report. This was far below the 160,000 estimated by Wall Street analysts and the upwardly revised 180,000 job gains in August.
Still, the US unemployment rate was expected to be unchanged from August at 3.7%. This should come as no surprise to Stephen Dover at Franklin Templeton Institute, who notes that typically there is a one or two year lag between higher interest rates and their impact on employment growth. The Federal Reserve started raising rates 18 months ago, signaling this Friday’s job report may have few surprises.
But Dover believes the US’s economic resilience is fading in the fourth quarter of 2023. He mentioned in his Oct. 3 post that the restarting of student loan repayments will likely drag on spending, while the impending US government shutdown risk later this year will impact growth.
The de-inverting yield curve is flashing recession warnings
Earlier Wednesday saw a significant bond selloff as the yield curves on two-year and ten-year Treasury notes began de-inverting, which is usually a sign that a recession is around the corner.
JPMorgan fixed income portfolio manager Priya Misra told CNBC that this recent move in Treasuries “has been a little bit more dangerous.” She warned that the de-inversion of the curve “makes a hard landing much more likely.”
DoubleLine Capital Founder Jeff Gundlach is more pessimistic still. He sounded the warning bell in a post on X (formerly known as Twitter) early Wednesday, urging investors to “buckle up.”
Where the opportunities are at
Amid the headwinds, plenty of investors remain confident that the rise of artificial intelligence and an influx of government spending will keep things afloat. But Bill Gross, who long reigned as America’s “bond king” when he was chief investment officer at Pimco, is not so sure.
“Can AI and $2 trillion fiscal deficits going forward validate that ‘it’s different this time?’ I’m suspicious,” Gross wrote in his investment outlook note on Wednesday. “I’d pass on stocks and bonds altogether in terms of future total returns.”
Gross prefers to bet on taking arbitrage positions on individual stocks like Activision Blizzard, and Capri Holdings, both companies reportedly on the verge of being bought by Microsoft and Tapestry, respectively.