A Columbia Threadneedle look at the “tug of war” between inflation and recession yielded a familiar refrain: A hard landing is more likely than a soft one, and expect depressed corporate earnings for 2023.
A panel consisting of Edward Alhussainy, senior interest rate and currency analyst; Anwiti Bahuguna, head of multi-asset strategies; and Steven Bell, chief economist for Europe, the Middle East and Africa, convened online yesterday to take a global view of the discussions about the Fed’s hawkish response to inflation.
Other central banks have been acting in similar fashion by raising interest rates and enacting policies that reflect the specific pressures within their countries. But whither the Fed goes, so goes the rest of the world, the panelists said.
“Despite immense volatility in both bond markets and equity markets, we’ve seen absolutely no sign of any trouble in the initial jobless claims. In other words, many parts of the market are screaming recession and caution, but if you look at jobless claims, they’re at rock-bottom,” Bahuguna said. “I haven’t seen anything that says that the tightening that they’ve already done—and what they’re planning to do—has had any impact on the labor market of any significance yet.”
Alhussainy said that the Fed must find this frustrating, as suppression of the labor market is an integral part of conditions that would ease inflation. He said if the Fed is successful and in 12 to 18 months underlying inflation is at around the 2% that’s hoped for, the soft landing/hard landing scenarios loom for the end of 2023 and early 2024.
“In the one, there’s not too much damage to the labor market, we get lucky and it turns out that the inflation was supply-side driven, and perhaps the tightening of the financial conditions disproportionately affects those areas of inflation that are running hot right now,” he said. “Then the Fed arrives at the soft landing.”
However, he cautioned, the Fed’s been dialing up the probability of a hard landing in the last couple of months, and the data is beginning to show that this is the far more likely outcome.
For example, the jobs report that came out today showed that openings dropped by 1.1 million to 10.1 million on August 31. The drop was just one quarter of the four million decline that Bahuguna said would show that the Fed had gone far enough with its interest rate hikes and a soft landing would be possible.
“If today’s job report comes down three to four million and we don’t see unemployment rise, then that’s the soft-landing scenario. Demand for labor comes down, but we don’t actually have to fire people,” she said, ahead of the report. “That scenario is not likely. When unemployment starts rising, it doesn’t start rising by half a percent or so. You very quickly go to 6% or 7% unemployment. That’s the hard landing.”
It’s also not possible to decelerate wage growth without increasing unemployment, she said, as there need to be a lot fewer jobs out there to dissuade employees from asking for 5% raises.