Can Unemployment Help the Fed? | The Big Conversation | Refinitiv

TL;DR

The US economy may not experience a recession in 2022, but the conditions will feel like a slowdown, with rising unemployment and tightening liquidity. A recession in 2023 is more likely, with a 60-65% chance according to market expectations. Corporates with pricing power and high inflation levels may hinder the Fed's ability to pivot. Equities are expected to be weak, with potential volatility and a need for a bottom in the market when unemployment rises.

Transcript

Historically, US equity markets have often put in a major low around the month of October. The Dow Industrials has apparently had its best month in 50 years. And U.S. GDP has had a decent rebound from the soft patch of the first two quarters of 2022. Does that mean that the equity lows are in, or has 2022 just been the precursor to a proper recessi... Read More

Key Insights

• 😮 The US economy may not experience a recession in 2022, but conditions will feel like a slowdown, with rising unemployment and tightening liquidity.
• ✋ High inflation levels driven by a tight labor market and pricing power of mega-corporations may limit the Fed's ability to pivot and prioritize growth over inflation.
• ✋ Equities are expected to remain weak, with high valuations and potential market correction.
• ❤️‍🩹 Bond yields may peak at the short end of the curve due to rate increases but could slide at the back-end as the economy slows down.
• 🥺 A recession and higher unemployment are expected in 2023, which may lead to a market bottom for equities.
• 🇨🇳 China's reopening could create competition for energy commodities.

Questions & Answers

Q: What are the chances of a recession in the US in 2022?

The chances of a recession in 2022 are slim, but market expectations suggest a 60-65% chance of a recession in 2023.

Q: What factors are contributing to high inflation in the US?

High inflation levels are primarily driven by a tight labor market and the pricing power of mega-corporations, which have been able to increase prices despite rising wages.

Q: Why are equities expected to be weak?

Equities are expected to be weak due to factors such as the strong dollar impacting earnings from overseas markets, weak earnings growth projections for S&P 500 companies, and high valuations suggesting a correction is needed.

Q: How will bond yields behave in the coming months?

In the short term, bond yields may continue to rise due to Fed fund rate increases. However, as the economy slows down and unemployment rises, the back-end of the curve may see yields slide and bond prices increase.

Summary & Key Takeaways

• The US appears to be heading towards a recession in 2023, with rising unemployment, tightening liquidity, and weak earnings growth projected for companies in the S&P 500.

• The current high inflation levels, driven by a tight labor market and pricing power of mega-corporations, may prevent the Federal Reserve from easily pivoting and prioritizing growth over inflation.

• Equities are expected to remain weak, with about 30% of earnings for S&P 500 companies being derived from overseas markets, where a strong dollar may negatively impact earnings. The high valuations of equities suggest room for a market correction.

• Bond yields are expected to peak at the short end of the curve due to Fed fund rate increases, but over the medium term, the back-end of the curve may be affected as the economy slows down and unemployment rises.