The market’s reaction to the weak July jobs report has fueled concerns that the Federal Reserve made a mistake in keeping interest rates at a 23-year high in its most recent meeting.
Now, the conversation in some parts of the investment community has shifted from the timing of interest rate cuts to the timing of a recession hitting the U.S. economy.
But several economists and equity strategists believe the market’s moves in recent days have been an overreaction, even as weak economic data has increased the risk of a recession.
Torsten Slok, chief economist at Apollo Global Management, told Yahoo Finance in an interview Tuesday that the market “has priced in too many cuts.” (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
Following Friday’s jobs report, investors immediately began pricing in at least four interest rate cuts in 2024, up from three after the July 31 Fed meeting. Some market commentators have even suggested that the Fed should cut rates before its September meeting.
Throck added that investors should take market expectations “with a grain of salt” given the volatile swings seen in market bets on Fed rate cuts over the past few sessions.
Slok pointed to data showing that consumers are still spending on activities such as flights, dining out and hotel stays, and argued that there is currently little sign of consumers pulling back. .
“Overall, there’s not much evidence that the economy is in or about to enter a recession,” Slok said.
Another configuration
The most worrying aspect of July’s employment report was that the unemployment rate rose to 4.3%, which triggered a tighter tracking of recession indicators. The report also showed that monthly employment growth slowed to the second lowest level since 2020.
But for Brett Ryan, senior U.S. economist at Deutsche Bank, the report still tells the same story: a labor market “buoyed by low layoffs rather than strong hiring.”
“The composition of the rise in unemployment is a little different than what we typically see at the beginning of a recession,” Ryan said.
Ryan argued that the rise in unemployment was primarily due to an increase in labor supply (people entering the labor force for the first time or those just returning to work) rather than an increase in permanent layoffs. .
“You don’t want to overreact to one data point,” Ryan said. “Therefore, there is no question that the risks have increased and we are leaning toward the Fed starting at a more aggressive pace of rate cuts, but we are not there yet.”
story continues
For example, weekly new jobless claims recently reached their highest weekly level in nearly a year. But Ryan points out that the four-week average for new jobless claims has actually declined, excluding Texas, where workers were evacuated due to Hurricane Beryl’s flooding.
Bank of America U.S. economist Michael Geipen took a similar position, saying that absent large-scale layoffs, labor market trends provide more rationale for a large-scale emergency rate cut than the market is pricing in. I wrote in a note to customers that it was also weak.
“While a September rate cut is now effectively locked in, we do not believe the economy requires aggressive recession-sized rate cuts,” Gapen said in a note to clients on Monday.
“Risk assets can be recovered.”
Some strategists see the market’s sharp reaction to this data as an opportunity to become more active in the stock market.
Jean Boivin’s BlackRock Investment Institute said in a note to clients on Monday that fears of a recession are “overstated.”
“We believe risk assets could recover as recession fears ease and the rapid unwinding of carry trades stabilizes,” the BlackRock team said. “We remain overweight to US equities, driven by the AI juggernaut, and see the decline as a buying opportunity.”
Seema Shah, chief global strategist at Principal Asset Management, agrees.
Shah told Yahoo Finance, pointing to Tuesday’s market rebound, saying, “What you’re seeing now is a little bit of reality that maybe the economic concerns are not as bad as expected. Confirmation,” he said.
Shah added that what matters for investors in this market moment is whether the macro story has completely changed. So far, she thinks it’s about the same.
“We expect the U.S. economy to slow, but we don’t expect a recession,” Shah said.
“We do expect the Fed to cut rates, but again we don’t expect aggressive rate cuts to be needed. So from that perspective, the backdrop hasn’t really changed that much for us.”
Federal Reserve Chairman Jerome Powell speaks during a press conference after the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Building in Washington, DC, July 31, 2024 (Andrew Harnik/Getty Images) (Andrew Harnik, via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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