US Tech Industry Faces Job Cuts...BlackRock Executive Says "Not Enough to Warrant Rate Hikes"

▲ United States, interest rates, layoffs/AI generated image

The U.S. labor market appears to be holding up on the surface. However, a Wall Street diagnosis suggests that a closer look at the internal situation reveals it's not hot enough for the Federal Reserve (Fed) to pursue further interest rate hikes. With expanding layoffs in the tech sector, slowing wage growth, and persistent service inflation concerns, the market's focus is shifting from rapid rate cuts to strategies for securing interest income in a high-interest-rate environment.

Rick Rieder, CIO of Global Fixed Income at BlackRock, stated in an interview with Bloomberg on July 2 (local time) that the U.S. labor market is “stable and okay, but not impressive overall.” He explained that last month's strong employment figures relied heavily on approximately 54,000 state and local government jobs and growth in the restaurant and bar sectors, and these effects were significantly absent in the latest indicators. While the healthcare and education sectors are supporting employment growth, it's difficult to view the hiring trend as being as strong as the pace of economic growth.

Rieder also pointed to expanding layoffs in the tech sector as a crack within the labor market. Citing Challenger layoff data, he noted that tech sector layoffs reached 443,000, an 83% increase year-over-year. He simultaneously highlighted that average hourly wages and wage-related indicators continue to slow, asserting that if companies were truly under significant pressure to secure talent, wage growth should have been stronger. His conclusion leans towards “a good economy, but just an okay level of employment.”

Regarding the interest rate path, Rieder believes that the latest employment data does not provide a strong case for further rate hikes. While he cautioned that expecting rate cuts in the next one or two meetings would be premature, he also stated there's no need to rule out the possibility of cuts later this year. Factors cited for easing inflationary pressure include oil prices falling below $70, improving energy costs, and the 3-month and 6-month moving averages of core goods prices being near zero. However, he assessed that service inflation remains high, and housing costs are a complex variable that cannot be solved by interest rates alone.

Regarding the Federal Reserve's communication style, Rieder suggested that flexibility is needed more than excessive forward guidance. He noted that dot plot projections often become less accurate over time and that it's undesirable for the market to meticulously transcribe every detail of the Fed's path. He stated, “an approach of speaking when there is something to say is good,” explaining that the Fed should clearly present the indicators and criteria it observes, and the market can then interpret those criteria. He also expressed the view that a certain level of surprise during a policy transition phase can create momentum in the economy and financial markets.

The core of the investment strategy is income, rather than betting on interest rate cuts. Rieder assessed that while it's not yet time to significantly increase U.S. rate exposure, real interest rates are approaching increasingly interesting levels. However, he found European duration more attractive, where growth slowdown and rate repricing are occurring more than in the U.S. He emphasized “income, income, income,” stating that in the current real interest rate and spread environment, yields of 6.5% or more can be generated. European high yield, European investment grade bonds, emerging markets, and commercial/residential non-agency securitization markets were presented as areas to secure yield. Conversely, he noted that U.S. investment-grade corporate bonds face significant supply pressure due to already accumulated issuance of $1.1 trillion, and their spread appeal is limited.

[Article Key Summary]

-Rick Rieder assessed that the U.S. labor market is stable but not strong enough to justify further interest rate hikes.

-443,000 tech sector layoffs, an 83% increase year-over-year, and slowing wage growth were presented as evidence weakening the argument for an overheated labor market.

-The analysis suggests that investment strategy should focus on an income strategy aiming for yields of 6.5% or more and global bond diversification, rather than betting on rapid interest rate cuts.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*