Pimco sees risk of ‘sooner and deeper recession’
An attendee speaks to a recruiter at a Florida job fair in February.
Investors are reconsidering the risk that the U.S. economy could be about to tip into a recession, following data this week which revealed the red-hot labor market is finally loosening up.
On Wednesday, data showed the private sector added a fewer-than-expected 145,000 jobs in March. This comes a day after the Labor Department announced job openings fell to a 21-month low of 9.9 million for February, down from a revised 10.6 million for the prior month. The pair of reports had investors flocking to the safety of Treasurys — everything from 6-month T-bills TMUBMUSD06M, 4.793% through 20-year bonds — and reignited recession fears that left gold prices near record highs.
The economic data also dented the appeal of stocks, with the S&P 500 index and Nasdaq Composite down in New York morning trading. Traders now see an almost-certain chance that the Federal Reserve’s main interest rate target will fall by year-end from where it is now — between 4.75% and 5%; they think there’s a decent likelihood that policy makers will pause next month and in June before cutting rates in July.
Investors’ willingness to take on risk has changed since March, when all three major stock indexes DJIA, 0.18% SPX, -0.38% COMP, -1.25% managed to shake off concerns about the global banking sector and posted their largest monthly gains since January. That occurred as the 2-year Treasury yield experienced its biggest one-month plunge since January 2008, and the 10-year TMUBMUSD10Y, 3.292% declined by the most in a month since March 2020.
On Tuesday and Wednesday, though, the S&P 500 and Nasdaq fell in tandem with yields as traders priced in a scenario in which the Fed could essentially be done with interest-rate hikes. Fed funds futures traders have clung to prospects of rate cuts by year-end since March, when troubles at Swiss banking giant Credit Suisse CS, -1.48% prompted them to factor in a full percentage point of easing from the Fed through December.
“It looks pretty clear that we are going to see parts of the economy break and we are heading for a recession,” said Edward Moya, a senior market analyst for the Americas at OANDA Corp. in New York. “We forget that there’s also a banking crisis going on, so there’s going to be some pain that’s really going to cripple small and medium businesses. We are going to see some tough times and are probably going to see this play out in markets.”
Talk of a possible U.S. recession has gone on for about a year, without coming to fruition — helping stock investors focus on the brighter side of things and all three major indexes score year-to-date gains.
Just two days ago, a surprise oil-production cut announcement led by Saudi Arabia over the weekend put the prospects of $100-per-barrel oil prices back on the radar, and initially seemed bad for the Fed’s ongoing fight against inflation. As Monday’s trading wore on, investors regarded higher oil prices as beneficial for some U.S. companies, and used the OPEC+ announcement as an opportunity to drive Dow Industrials and the S&P 500 to a higher finish.
While this week’s data supports the idea that a softer labor market could help ease wage pressures, investors appeared to be more focused on the signs it is sending about the prospects for economic growth, according to Moya. “We now seem comfortable living with $100-a-barrel oil and, right now, it’s pretty clear we are recession-bound. There were a lot of people thinking an oil spike would keep inflation jitters in place, but it seems like there’s too much weakness in the economy to do that.”
Bond giant PIMCO released a six- to 12-month economic outlook for global markets and economies on Tuesday. In it, economist Tiffany Wilding and Andrew Balls, chief investment officer of global fixed income, said that recent volatility in the banking sector has raised the prospect of a significant tightening in credit conditions and, therefore, the risk of a “sooner and deeper recession.”
Meanwhile, Mark Haefele, CIO of UBS Global Wealth Management, said his firm is maintaining a cautious stance on growth stocks and that a “new bull market is unlikely on the horizon.” And at BMO Capital Markets, rates strategists Ian Lyngen and Ben Jeffery said “there is mounting evidence that the notion the U.S. economy is on strong enough footing to withstand materially higher interest rates may have been misplaced.”
Tuesday’s Job Openings and Labor Turnover Survey “showed job openings decelerating a lot more rapidly than initially anticipated, suggesting the number of openings per person has fallen quite sharply,” said Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities in New York.
It was “the first indication that firms are stopping their hiring sprees,” Goldberg said via phone. “The question for markets is, ‘Will this translate into weaker payroll growth in the coming months?’”
TD doesn’t see a growing risk of a recession since “the labor market is quite strong,” Goldberg said. The firm expects Friday’s nonfarm payroll report to show a gain of 270,000 jobs in March, above the 238,000 median forecast of economists polled by The Wall Street Journal.
“We are starting to see the first signs that the labor market is starting to react to tighter financial conditions,” Goldberg said. “But we can’t take away much from this about the next few payrolls or the depth of the next recession.”Remote layoffs have become more common since the pandemic as employees worked from home. But some workplace experts have called the practice insensitive.
