Question: Is the U.S. labor market as strong as data suggests?
Phil Orlando: We don't believe the labor market is as strong as the headline numbers would suggest. Looking at the October results specifically, there was a significant downward revision in August and September. Adjusted for those revisions, this was the weakest jobs report in the establishment survey that we've seen since December of 2020. Looking at the household survey, that number actually lost about 350,000 jobs. It was the single worst month for the household survey since April of 2020 and the depth of the pandemic recession. The rate of unemployment over the last six months has increased from 3.4% in April of this year to 3.9% in October. That one half of 1% increase triggers something referred to as the Sahm rule in which, if the rate of unemployment increases by a half of 1% or more within a 12-month period, then that suggests that the economy is slowing down, maybe slowing into a recession. The labor market right now is struggling and that's something that we're watching very closely.
Question: Why has the Federal Reserve paused rate hikes?
Orlando: In our view, the Federal Reserve may very well be done here in terms of hiking interest rates. And the reason for that is that inflation is coming down gradually sticky and persistent, but it's moving in the right direction. The economy is slowing, the rate of unemployment is increasing. The Federal Reserve is looking at the fact that the bond market, benchmark 10-Year Treasuries over just the last few months have increased from about 3.5%, up to 5%. So the Federal Reserve, I think, is very comfortable with the fact that the bond market is actually doing a lot of their heavy lifting. They don't need to materially increase interest rates anymore. The economy is doing what the Fed was hoping it would do, which is to slow down and bring inflation back to their 2% target. At this point, our best guess is that the Federal Reserve is done hiking interest rates.