Ekaterina Bigos, chief investment officer for Asia at AXA Investment Managers, said the data was converging towards the Federal Reserve normalizing monetary policy rather than aggressively cutting interest rates.
“I still think normalization is an option rather than rate cuts,” he said in an interview with FSA. “I think the next jobs report is going to have to be pretty dramatic for the Fed to consider cutting rates.”
“The difference between a rate cut and normalization is that it's 50 basis points instead of 25 basis points,” she explained.
In her view, despite recent growth fears and the invocation of the so-called thumb rule, the Fed has the data it needs to gradually move interest rates back toward stable economic growth levels.
The rule predicts that a recession has begun when the three-month moving average of the U.S. unemployment rate is at least 0.5 percentage points higher than its 12-month low.
The rule, widely used by investors as an indicator of an economic downturn, was triggered by weaker-than-expected employment data but concerns began growing that the Fed was lagging behind in cutting interest rates.
Bigos expects that if the Fed is forced to act and cut rates by 50 basis points, it will be negative for risk assets.
“For risk assets to maintain positive momentum, the Fed needs to start normalizing monetary policy — not because they need to save the economy, but because the data is converging.”
In her view, the data is not conclusive enough to justify aggressive rate cuts from the Fed, despite what some market participants are pricing in.
“We think the data is converging in the direction it should be,” she said.
Just a few months ago, there was widespread market consensus and optimism that the economy would achieve a soft landing scenario or at least avoid a recession.
Since then, expectations for economic growth have shifted rapidly, due to disappointing performance from major U.S. technology companies and weak employment data.
As a result, Bigos said some market participants are expecting rate cuts of more than 100 basis points towards the end of the year.
But “our view, and one shared by Claudia Thurm, who created the model, is that the data are inconsistent and often contradictory.”
Immigration is not taken into account
Bigos pointed to immigration as one of the reasons why the unemployment rate wasn't as good as the market expected.
“There's a lot more immigration into the United States,” she said. “I think that's a potential differentiator from the rising unemployment rate, but it's not for the wrong reasons.”
“The wrong reason is that companies started cutting staff.”
She argues that rising unemployment due to immigration, rather than layoffs, is a generally positive sign for the outlook for the U.S. economy.
“The concern is that employment is increasing because companies are becoming more conservative and starting to cut staff.”
Despite these concerns, Bigos said the economy's fundamentals have not yet deteriorated significantly enough to justify fears about growth.
“In economies where the labour market is very tight, particularly in services where it is tightest, immigration can be a good catalyst to ease the tightness of the labour market,” she explained.
“The exact trends and manifestations in numbers and statistics will become clearer later.”
