September 5, 2023, New York, NY ~ We continue to forecast that 10-year treasury bonds are finding a bottom in the 4-4.25% area and are likely to rally significantly into year-end as Europe enters a recession and the US labor market and inflation indicator continue to cool.
Recent Data for Europe
Based on recent data from Europe, we believe the Eurozone is likely to enter a recession this year. Here is why we believe this is the case:
The most recent Eurozone PMI came in at 47 vs. 48.6 the prior month with a reading below 50 indicating a contraction.
German retail sales for July came it at negative .8% and negative 2.4% year-over-year.
Meanwhile, inflation has not declined in Europe with the most recent year-over-year inflation coming in flat at 5.5%.
The ECB is likely to continue raising rates in the face of this level of inflation. Unlike the US Fed, the ECB has a single mandate to fight inflation even if it produces a deep recession.
It is also important to note that approximately 45% of mortgages are adjustable in the Eurozone, with less than 10% floating in the US, which will place tremendous pressure on Eurozone consumer spending as short-term rates rise.
Recent Data for the US
In the US, recent data has indicated a dramatic deceleration of the US job market. The most recent jobs report showed:
a sharp increase in the unemployment rate to 3.8% from 3.5%
a deceleration in the increase in wages from .3% to .2%.
The 3-month average number of private jobs came in at 140k vs. 212k the prior 3 months
two-thirds of the increase in private jobs over the last 3 months came from the health services sector, which is increasing on a secular basis due to the aging of the population vs. a cyclical increase in labor demand due to economic growth.
Finally, the most recent JOLTs reading came in at 8.8MM vs. a recent high of 12MM openings.
In addition, US inflation data continues to decelerate with year-over-year PPI at .7%, CPI-R (CPI Core with shelter inflation estimated using Case Shiller) at below 1% and year-over-year headline CPI at 3.3%. The most recent PCE-Core data showed a 3-month (average monthly) core reading of .24% vs. the prior 9-month average of .38%. This improvement came about despite the flawed estimate of shelter inflation incorporated in PCE Core. PCE Core with shelter inflation estimated using housing prices came in at only 2.4% year-over-year.
Given this recent data, we are projecting that the Fed will stay on hold for the remainder of this cycle and that Europe will head into a significant recession this year, resulting in a significant rally in global government bonds which could cause the US 10- year rate to drop into the 3-3.5% range.