US Economist Tom Simons identified several factors driving this sustained period of elevated inflation, including wage pressure stemming from competition in a tight labor market, as well as a prolonged period of weak productivity. In addition to workers shifting to new roles and dealing with new challenges in a short-staffed environment, the US also saw a massive decline in the number of older workers in the labor force, and consequently, their experience. There were 739,000 fewer people over 65 participating in the labor force as of August than there were before the pandemic. If you assume these 739,000 people over 65 had an average of 40 years of work experience, that represents 30 million years of experience exiting the US labor market. This is making it harder to help newcomers get on their feet quickly and hit the ground running in their new roles. As the job switching slows and workers gain experience in their new roles, Tom expects productivity will ultimately rebound and unit labor costs will fall. Regardless, Tom still forecasts a recession begins early in ’24, due to the lags from tighter Fed policy.
Chief Market Strategist David Zervos says that economic sentiment has significantly bolstered risk asset prices, but warns that those feeling encouraged by the brighter economic outlook should also be factoring in the Fed reaction function. David is skeptical the Fed will be able to quickly declare victory over inflation and expects that a solid economic outlook should translate to a more restrictive Fed, for a longer duration. As a result, he still favors high yield over stocks, which he thinks could pull back into the end of the year.
Global Head of Equity Strategy Christopher Wood noted that while the current rate hike cycle appears to be approaching its conclusion, oil prices remain the most significant spoiler for the Fed, due to its potential to disrupt inflation expectations. Nonetheless, he expects that the 10-year Treasury yield is likely to fall in the intermediate term as the delayed impact of monetary tightening should arrive in the form of an economic downturn in the coming quarters. Longer term, he believes that the debt servicing costs of running America's huge fiscal deficits should make Treasuries including the 10-year more vulnerable. On China, while he thinks the challenges facing the Chinese economy remain formidable, Christopher maintains that the data is not quite as bad as the sentiment.