US Tech Industry Faces Layoff Blizzard...BlackRock Executive: "Not Enough for Interest Rate Hike"

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The U.S. labor market appears to be holding up on the surface. However, a closer look at the internal situation reveals a Wall Street diagnosis that it's not hot enough for the Federal Reserve (Fed) to proceed with 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 interest rate cuts to strategies for securing interest income in a high-interest rate environment.

Rick Rieder, CIO of Global Fixed Income at BlackRock, told 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 increases in the restaurant and bar sectors, and that these effects were largely absent in the latest indicators. While the healthcare and education sectors are supporting job growth, it is difficult to consider the hiring trend as strong as the pace of economic growth.

Rieder also pointed to the expanded layoffs in the tech sector as a crack within the labor market. Citing Challenger layoff data, he stated that tech sector layoffs reached 443,000, an 83% increase year-over-year. Simultaneously, he noted that average hourly wages and wage-related indicators continue to slow, arguing 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 current employment figures do 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. The decline in oil prices below $70 and improving energy costs, along with the 3-month and 6-month moving averages of core goods inflation being close to zero, were cited as factors easing inflationary pressure. However, he assessed that service inflation remains high and housing costs are complex variables that cannot be resolved by interest rates alone.

Regarding the Federal Reserve's communication style, Rieder emphasized the need for flexibility rather than excessive forward guidance. He noted that dot plot projections often lose accuracy over time, and that a structure where the market meticulously records every detail of the Fed's path is undesirable. He suggested that an approach of “speaking when there is something to say” is better, 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 becoming increasingly interesting. 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 yields. Conversely, he diagnosed that U.S. investment-grade corporate bonds face significant supply pressure due to already $1.1 trillion in accumulated issuance, and their spread attractiveness 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 investment strategy, according to analysis, should focus on income strategies aiming for yields of 6.5% or more and global bond diversification, rather than betting on rapid interest rate cuts.

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