Some of the world’s biggest investors are considering whether the Federal Reserve is closer to scoring a hat trick by breaking the back of inflation without pummeling the labor market or the US economy.
(Bloomberg) — Some of the world’s biggest investors are considering whether the Federal Reserve is closer to scoring a hat trick by breaking the back of inflation without pummeling the labor market or the US economy.
The idea of a soft landing, with the Fed slowing growth just enough to tamp down inflation yet not cause the economy to roll over, got a boost on Friday on news employers added a healthy number of jobs in August. Still, investors worry whether it’s time to wager on the central bank’s progress.
“We can think about having a soft landing,” Jim Caron, chief fixed income strategist at Morgan Stanley Investment Management Inc., said on Bloomberg Television Tuesday. But it’s “a very hard bet to place. And the markets are not necessarily calling for that.”
An inverted US Treasury yield curve, a historic harbinger of a recession, is one market metric that is still warning the Fed can’t topple inflation without doing the same to growth.
Yields on 2-year Treasury securities are now about 17 basis points higher than those with 10-year tenors. The gap has shrunk from being as deeply inverted as 58 basis points in early August.
Treasury yields surged on Tuesday, partly amid a wave of corporate debt offerings. The 2-year note yield rose about 10 basis points to 3.49%, up 0.20% from a year ago. Ten-year Treasury yields are hovering around 3.32%.
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Rick Rieder, the chief investment officer of global fixed income at BlackRock Inc., the world’s biggest asset manager, said on Bloomberg Television on Friday that in the wake of the jobs data he doesn’t think “a soft landing is that hard to land the plane on. The economy is in pretty good shape.”
But Rieder said he’s still holding a lot of cash, as well as leaning toward buying high quality short-term debt given the sharp rise in yields this year.
“We are sitting on a fair amount of cash,” Rieder said.
Goldman Sachs Group Inc. Chief Economist Jan Hatzius says a soft landing is still possible for the US economy and puts the likelihood for a mild recession to start in the next year at about one chance in three.
“The US economy can achieve a soft landing, even though the path is narrow,” Hatzius wrote in a Sept. 5 note.
The firm predicts the Fed will lift rates 50 basis points at their policy gathering later this month, followed by 25 basis point boosts in November and December. There’s upside risk to the near-term forecast if the August consumer price reading on Sept. 13 proves problematic, he said.
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