Investors appear to be reconsidering the risk that the U.S. economy could be about to tip into a recession, following Tuesday’s data which revealed the red-hot labor market is finally loosening up.
That data showed job openings fell to a 21-month low of 9.9 million in February, down from a revised 10.6 million for the prior month. Soon after those figures came out, alongside a report revealing factory orders declined a third time in the past four months, investors flocked to the safety of Treasurys — particularly 6-month
TMUBMUSD06M,
and 1-year T-bills
TMUBMUSD01Y,
plus the 2-year note
TMUBMUSD02Y,
— and sent gold prices toward record highs.
Tuesday’s data dented the appeal of stocks, with all three major indexes
DJIA,
COMP,
lower in afternoon trading. The ICE U.S. Dollar Index
DXY,
was off 0.5%. And traders now see a 98% 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 see a decent chance that policy makers will pause next month and in June before possibly cutting rates in July.
The tone in financial markets has shifted since March, when stocks managed to shake off concerns about the global banking sector and posted their biggest monthly gains since January. That occurred as the 2-year Treasury yield experienced its biggest-monthly plunge since January 2008, and the 10-year
TMUBMUSD10Y,
had its largest monthly drop since March 2020.
On Tuesday, though, stocks fell in tandem with yields as traders priced in a scenario in which the Fed is essentially done with interest rate rate hikes after May. 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,
prompted them to factor in a full percentage point of easing from the Fed through December.
“Because we’ve really seen job openings remain elevated for quite some time, today’s data was significant,” said Edward Moya, a senior market analyst for the Americas at OANDA Corp. in New York. “It looks pretty clear that we are going to see parts of the economy break and we are heading for a recession. 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 a day 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 Tuesday’s job-openings data generally supports the idea that a softer labor market could help ease wage pressures, investors appeared to be more focused for now 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.”
At bond giant PIMCO, economist Tiffany Wilding and Andrew Balls, chief investment officer of global fixed income, released a 6- to 12-month economic outlook for global markets and economies. In it, they 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.”
“The JOLTS [Job Openings and Labor Turnover Survey] data 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’s 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.”