Growth, Inflation & Credit Crosscurrents

Published 2024-07-19

In his midyear outlook for 2024, DoubleLine Deputy Chief Investment Officer Jeffrey Sherman on July 16 distills his analysis into three dominant factors: the slowing pace of growth, signs of progress on inflation and credit-cycle cross currents. Among the highlights of Mr. Sherman’s presentation:

(0:01) U.S. real GDP growth forecasts for 2024 in comparison to years past show that, “outside those aberration years of 2020-2021, the U.S. economy is back to post-GFC trend growth.” However, when examining growth rates post-Second World War, Mr. Sherman notes real GDP growth has “flattened somewhat” since the Great Financial Crisis.

(3:16) After surprising forecasters to the upside in 2023, the U.S. economy in 2024 has undershot expectations. The labor market, key to consumer spending, “will dictate the fate” of the economy between a soft landing or something worse.

(4:40) Notwithstanding risk-market investors’ craving for Fed rate cuts, U.S. financial conditions appear “somewhat accommodative.”

(6:07) Warning signs for growth: the ISM services purchasing managers index for June joined its manufacturing counterpart in below-50 territory. “This is definitely something to think about as services is a big driver of the overall economy.”

(7:42) Inflation roundup: export and import prices slightly up, as are for ISM prices paid; goods prices deflation continuing, helping with core CPI; shelter inflation starting to decline.

(13:54) Labor market roundup: Mr. Sherman explores the divergence between the household and establishment surveys, reads the tea leaves of part-time employment and points out the “disconcerting” rise of the unemployment rate relative to its 12-month and 36-month moving averages. The rise in U-3, however, has lacked confirmation, he notes, in the jobless claim statistics, particularly in a flat plotline, rather than a spike higher, for continuing claims. He also observes a convergence between job openings (in decline) and people looking for work (on the rise).

(31:40) Fixed income roundup year-to-date: pain points in the high quality sectors, while off- Aggregate, lower credit-quality sectors have done very well. Asset-backed securities (ABS), collateralized loan obligations (CLOs) and commercial mortgage-backed securities have been strong.

(34:07) Treasury yields, 2-, 5-, 10- and 30-year tenors: “I think we've seen the peak in yields, put back in late 2022, for the cycle, with a retest in ’23. Most things are at the middle if not closer to the bottom of their trading range.”