Labor Market

The Fed hiked 25 basis points at yesterday’s FOMC meeting while also signaling that the tightening cycle is now on hold. We discuss the short-run and long-run implications for Treasury yields.

Pent-up demand for services is keeping the global economy going, but we still expect recession over the next 12 months. Investors should keep a cautious portfolio stance.

The latest round of earnings calls from the systemically important banks was encouraging on balance. Households are still flush and still spending and consumer and business delinquencies remain remarkably low. Though a recession is surely coming, it doesn’t seem to be lurking just around the corner.

A benign disinflation is probable during the remainder of 2023. Unfortunately, just when most people become convinced that a recession has been avoided, a recession will begin.

Through February and March, the number of US ‘job losers’ surged by almost half a million. Constituting the largest two-month increase in Americans who have lost their job since the depth of the pandemic. Unless we see a big drop in the number of job losers in the coming months, the correct investment strategy is still to position for a US recession that starts in 2023.

Eventually South Africa will do its macro rebalancing the least painful way: via adjustments in nominal variables such as prices and currency, rather than in real variables such as jobs and incomes. That entails a much weaker rand in future.

Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.

Colombian assets are inexpensive, but they are cheap for a reason. The economy is entering a growth recession while inflation will remain sticky and above target. Further, President Gustavo Petro’s policies will lead to lower investment, rising political volatility, and public debt deterioration. Continue underweighting Colombia across all asset classes.

We think the banking turmoil set off by Silicon Valley Bank’s failure will prove to be less than it’s been cracked up to be and that it will not derail the near-term equity we expect.

High rates have hurt real estate and, now, banks. The next shoes to drop: Loan growth, profits, and employment. Stay defensive. Recession is probable, but risk assets have not priced it in.