Labor Market

European profits margins are elevated. Will a mild recession be enough to bring them down?

This year’s rise in commodity prices represents a blow-off rally rather than the start of a durable bull market. The global economy is heading for a recession. Stocks, commodities, and other risk assets are vulnerable.

In the near term, favor oil and oil producers outside the Gulf Arab states. Over a 12-month horizon, favor US and North American equities, defensive sectors over cyclicals, and safe-assets. Within cyclicals, stick to energy and defense.

In the short run, global risk assets are vulnerable due to rising oil prices and bond yields. Cyclically, a global economic downturn will weigh on global risk assets.

We look beneath headline data to assess the state of the labor market in cyclical goods-producing industries that have previously led overall nonfarm payrolls and in the services segments that have recently been leading the charge. The bottom-up view looks a lot like the top-down view: the labor market is softening, but very slowly, and offers no indications that a recession is at hand.

EUR/USD collapsed in the wake of last week’s hotter-than-expected US CPI report. Is this pessimism warranted and will the euro’s trading range that has prevailed since 2023 breakdown?