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Investors ‘in for an unfortunate alignment of circumstances,’ economist says

State Street Global Advisors Head of Policy Research Elliot Hentov joins Yahoo Finance Live to discuss bond market expectations for the Fed meeting, investor sentiment, a recession, the debt ceiling, and the outlook for the economy.

Video Transcript

RACHELLE AKUFFO: Well, the Fed isn't the only thing weighing on markets. The ongoing debate about the debt ceiling also has the potential to dampen sentiment. This alongside recent economic data is leading some economists to say there won't be a soft landing for the US, but also that the recession won't be as dire as some say.

Joining us with more is Elliot Hentov, the head of policy research at State Street Global Advisors. Good to see you, Elliot. Obviously, a big stew of things. We are expecting some volatility ahead of this debt ceiling standoff, though I don't think anyone's actually expecting a default. But when you add that with already uncertainty about when the Fed will pivot and perhaps bond markets pricing a little too much optimism, how should investors be looking at this period?

ELLIOT HENTOV: Yes, I think we are in for an unfortunate alignment of circumstances with the debt ceiling crisis going to emerge when the macro data really takes a step south. So the bond market, as you pointed out, has been very optimistic.

I just want to remind viewers here that last summer or last spring, the bond market was forecasting the first rate cut now, yes, for February of 2023, and obviously, we're very far away from that. So I would caution viewers again to look at the bond market's assumptions and rethink whether, indeed, they think inflation and growth comes down at a pace that allows-- gives political cover to the Fed to undo some of the rate hikes they've done over the past year.

Final word on the debt ceiling, what did I want to talk about? A lot of the macro data, yes, US economic data has been pretty decent so far, particularly the fourth quarter of last year. But when you look at a lot of other indicators that are forward-looking, it suggests we're about to head for a much stronger slowdown than anticipated.

RACHELLE AKUFFO: And obviously, there's a lot of noise in the market with every data point that comes out. Which factors are you focusing on when you're trying to determine the path not just that the Fed might take, but perhaps the sort of recession that might be ahead as well?

ELLIOT HENTOV: Well, there's no great mystery here. This is-- it's the usual stuff. I would say some of us economists look a little bit more at indicators that have had, let's say, a better track record in terms of forecasting recession. So if you look at jobs numbers, for instance, the continuing job claims have had a much better predictive power in terms of future economic cycles. And there, for instance, we hit a critical threshold towards the end of the last year, which is that continuing job claims are up only about 14% off their lows.

Now that may not sound like much, particularly because absolute numbers are still pretty low. But whenever those numbers have gone up by that extent, that has usually brought a recession-- or put it this way, every recession has been preceded by that type of jump within the six to nine months beforehand. So again, that's just one example on the jobs front.

If you look at inflation, if you disentangle the inflation numbers, you see that particularly wage related inflation is still very sticky, services related inflation very sticky. Does not look like the whole disinflation wave that is supposed to basically precede the rate cuts is really taking hold in critical areas of the inflation metrics.

RACHELLE AKUFFO: And we know, of course, the Fed will be keeping an eye on that employment data. But as we look at other central banks, what we're seeing the ECB also coming out this week, as well as the Bank of England. How are those expectations different? Obviously, they have different pressures as a result of what they saw with their energy crunch.

ELLIOT HENTOV: Well, they have divine intervention in support of their actions. What do I mean? Obviously, one thing that we were all worried about was the nature of the winter in Europe. And that obviously has passed, at least from an economic point of view, passed incredibly well, well above expectations. And so basically, it's not an equal distribution curve of outcome.