Aligning with the U.S. Labor Day holiday, Matthias Scheiber, head of Allspring’s Systematic Edge Multi-Asset team, and Travis Keshemberg, senior portfolio manager on the Systematic Edge Multi-Asset team, review the U.S. employment situation and discuss the potential opportunities and challenges in the next 6 to 12 months.
Travis Keshemberg: Here with me is Matthias Scheiber, head of Allspring’s Systematic Edge Multi-Asset team. And I’m Travis Keshemberg, senior portfolio manager on the Systematic Edge Multi-Asset team, and you’re listening to On The Trading Desk®. Thanks for joining me, Matthias.
Matthias Scheiber: Thanks for having me, Travis.
Travis: With the U.S. Labor Day holiday right around the corner, we thought it was a fitting time to review the U.S. employment situation. And we’ll also provide an overview of our current outlook on different asset classes. I can start things off with some details about the latest U.S. employment report, which was strong. The August 4 jobs report revealed that, for July, U.S. hiring remained firm with employers adding 187,000 jobs. The unemployment rate fell back to 3.5%, making the trailing 15 months one of the strongest periods of employment in the U.S. since the 1950s. On September 1, August’s unemployment and non-farm payrolls will be released and current forecasts are calling for similarly strong results. There’s some concern that the shutdown of Yellow Trucking and the corresponding displacement of 30,000 workers will affect the employment situation. But the jobless initial claims, which are released weekly, haven’t reflected any increases. In fact, ongoing claims have continued to trend lower, while the supply and demand of labor appears to be a bit more balanced, the labor market is still tight. Unfortunately, we don’t have time today to explore the possible causes for the tight labor market, but factors such as the post-pandemic labor participation rate, U.S. demographics, onshoring, and supply chain issues make this a good time to be looking for a job in the U.S. I even heard one commentator state that this is what full employment looks like. While employment is important, our team spends a great deal of time looking at all types of data to better understand the total macro environment with the end goal of developing a robust global investment outlook that we can implement in our portfolios. We tend to frame things through the lens of growth, inflation, and interest rates.
Matthias: It’s clear from the data that you have shared that U.S. employment appears to be in a really good place right now. So, what does the broader macro picture look like based on growth, inflation, and rates?
Travis: Well, here’s the macro backdrop from those three perspectives. In terms of growth, U.S. growth remains shockingly robust, though global growth continues to slow, especially in China. While the labor market and consumer spending remain strong, the U.S.’s service sector has been slowing and manufacturing still remains weak. With respect to inflation, the latest price data for the U.S. Consumer Price Index was better than expected on the headline number. The headline number represents total inflation, which includes food and energy, while the core number, which excludes those two categories, has remained sticky and above headline inflation. Meanwhile, Europe’s inflation is still too high while China is actually seeing deflation. Regarding interest rates, after the last U.S. rate hike in July, we expect the Federal Reserve to be on hold. And we also expect a great deal of hawkish rhetoric as wages keep rising and unemployment keeps falling. Matthias, with that as a background, as you look out over the next 6 to 12 months, where are you seeing potential opportunities in the market and where are you seeing possible warning signs?
Matthias: As I see things, there’s not just one word that captures our common view. Our overall investment outlook is definitely not as strong as the U.S. labor market. Our base case is for further slowing, leading to a global, though mild, recession. The service, manufacturing, and housing sectors are expected to slow and employment is likely to weaken here. In this scenario, duration will likely be rewarded while the equity market outlook remains mixed. Earnings are likely to be impacted by weaker economic growth, but this could be offset by hopes of lower interest rates going forward. Nominal assets like government bonds should continue to outperform inflation-sensitive assets like commodities or Treasury Inflation-Protected Securities, TIPS. From a cross-asset-class point of view, with the loss of price momentum in equities and the further rise in bond yields, our momentum indicators for equities over bonds have weakened lately. Valuation remains challenging in equities because higher discount rates and lower earnings have pushed the price/earnings multiples higher. On the other side from an equity point of view, we think investors may want to consider markets that are experiencing positive earnings momentum. For example, Japanese equities. Despite the latest adjustment by the Bank of Japan, real yields remain deeply negative and Japanese companies are using cash for share buy-backs—both very positive for equities. On the other side, we are cautious in terms of emerging markets at this time as we aren’t expecting a meaningful stimulus in China, despite the recent weakness. U.K. equities have also seen a significant downgrade recently relative to other developed markets because the country’s currency has been strengthening, which acts as a headwind, while price momentum is also weakening. On a sector basis, we currently have a favorable view of cash-rich sectors, like, for example, in the U.S., large-cap technology companies rather than financial firms. From a fixed income point of view, we continue to favor Treasury bonds, despite the fact that rates on bonds with long maturities have recently increased. The money market, it appears, is no longer anticipating further rate hikes. Monetary policy tends to lag and it will take time for the previous rate hikes to work through the economy. In light of stabilizing inflation, we continue to expect a more pronounced focus on growth and believe that longer-duration bonds are likely to outperform as investors become increasingly worried about slowing economic growth. For now, we think it’s prudent to maintain a small overweight to high yield bonds and earn the income as overall market volatility remains low. Moving on to the currency view, in our view, the Japanese yen is an interesting currency to consider now compared to the U.S. dollar. The Bank of Japan’s recent loosening of its yield curve is confirmation that longer term, it will need to normalize monetary policy. While the U.S. dollar recently has been strong, our trend signals are slowly turning more positive on other developed market currencies. And last but not least, our commodity point of view, we remain cautious in commodities overall. We do see an upgrade in energy from underweight to neutral, given the OPEC+ (Organization of the Petroleum Exporting Countries) commitment to production cuts, inventories are still tight, and we continue to see increasing geopolitical risk in the Black Sea, through which 25% of Russian exports run. Commodities are down year to date, but their prices have been volatile lately, which would make it harder for central banks to bring inflation down.
Travis: Matthias, thanks for sharing our team’s outlook. That information certainly gives our listeners a lot to think about. It’s a good thing we have a long weekend here in the U.S., and thanks for joining me on this podcast.
Matthias: Thank you, Travis. It was great joining you, as usual. Thank you.
Travis: On behalf of Matthias and all of us on Allspring’s Systematic Edge team, I’d like to thank you for spending some time with us On The Trading Desk®.
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