It’s been a positive start to 2023 as the ‘’immaculate disinflation/slowdown’’ consensus has dominated the narrative, driving the rally in risk assets.

As curators of investment research, Substantive Research tracks all of the investment themes dominating that analyst agenda, the ones that matter most to our clients. Our trending themes service then collates these themes and weights them according to their relevance across our client base. 

So far this year, three themes have dominated our clients’ minds, and they are all inextricably linked; Labour markets, Fed Policy and Recession.

This is encapsulated in the ‘’immaculate disinflation/slowdown’’ view, which implies that inflation (particularly goods inflation) is, and will continue, to normalise. This should then bring an end to the Federal Reserve’s hiking cycle, just as the economy slows down, resulting in a possible recession (Recession versus no recession arguments are still mixed), which then sees the Fed start to cut rates, possibly as early as the end of 2023. 

The ‘spanner in the works’ is the labour market. Everyone is a labour economist these days, analysing the detail of every metric of employment data to predict the Fed’s data dependent guidance. That’s easier said than done however, as last week’s Non-Farm Payrolls clearly showed. Consensus forecasts were blown out of the water, when payrolls gained ​​517K vs the 185K consensus estimate. 

In our post payroll research curation work we featured analysis from analysts we think have historically provided sound analysis on labour markets. Andrew Zatlin aka ‘’the moneyball economist’’ from SouthBay Research, has consistently been one of most accurate labour market data forecasters in recent years. He was gracious enough to explain where he had got it wrong, concluding that there weren’t really any major trends that he had missed, just that the numbers were distorted by lower seasonal hiring, which led to less layoffs that most analysts didn’t account for.  His overall view is that the labour market will soften as the year progresses, playing into ‘’immaculate disinflation/slowdown.’’ 

Meanwhile, TS Lombard’s Steve Blitz said that the payroll data was statistically odd and that there is a risk of a higher inflation profile, regardless of whether there is a recession or not. He also thought that if the employment data is actually true, the Fed should never have slowed down with their rate hikes at the recent meeting.

Meanwhile, Gerard MacDonell from 22V Research reflected on how the labour market part of the inflation debate can often seem involved and unnecessarily complex. He says analysts argue over labour force participation, demographic trends, vacancies, quits, employment mix shift, and these days even the difference between average and marginal wage growth.  But in one way or another, most analysts are trying to figure out if — and by how much — the labour market has overshot full employment. MacDonell concludes that it probably has overshot, and the analysis he provides to prove this point is very compelling. Top marks to Gerard and his team for this. 

As for the other featured themes, when it comes to Fed policy, we always pay attention to former Fed Governor Larry Meyer from Monetary Policy Analytics. Meyer thinks the Fed will be slower to pivot than the market is currently expecting,  which  suggests that the fed funds rate is likely headed above 5% with no pauses and will stay there until early 2024. Meanwhile, the always excellent Julian Brigden from MI2 Partners believes the Fed hasn’t done enough to impact the stock market and so if they ease in H2, it will lead to higher core price pressures.   

As for the recession, forecasting can seem like a movable feast. Certainly, the narrative has shifted to this being less likely than it was just a few months ago. Michael Howell from CrossBorder Capital, who was a big market bear in 2022, now believes that the economic recovery is underway despite economists calling for a recession and points to China’s stimulus as the driving force behind this. Gary Shilling, who has called every recession since the 1970s, is sticking to his guns after his latest early 2022 call for a recession. 

The full list of Substantive Research’s top trending themes in the past week are as follows:

  • Labour Markets
  • Federal Reserve Policy
  • Recession
  • Market Cycles
  • Oil Markets

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