The U.S. economy will keep on growing this year but there are worrisome signs of recession for 2017, analysts at Barclays Plc said. The key indicator to watch is the monthly jobs report.
“The U.S. economy is sending mixed messages,” Ajay Rajadhyaksha, co-head of global fixed income research at the investment bank, said in a phone conference
with reporters. “Growth bounced back in the second quarter after a weak first quarter, but recent labor market data have been worrisome.”
The Department of Labor tomorrow is expected to report that the U.S. companies added 170,000 jobs in June, compared with a disappointing 25,000 a month earlier
. Payroll processer ADP today said companies added 172,000 people last month, but factories let go of 21,000 workers and construction employment fell by 5,000.
“If U.S. jobs reports disappoint for a few more months, a recession in 2017 is a distinct possibility,” Rajadhyaksha said. “Historical data on jobs creation show a recession can occur six to nine months after weak jobs reports. Then again, no other data are corroborating this.”
He pointed to strength in consumer spending as a sign that economy still has signs of life.
Barclays now estimates the global economy will shrink by TK percent, a revision from its earlier forecast of TK percent growth in 2017. Because of the Brexit vote to leave the European Union, the U.K. economy will contract by 0.4 percent next year instead of expanding by about 1.9 percent, while the euro area will grow by 0.6 percent instead of 1.7 percent.
As for investment recommendations, he said the stocks are expensive compared with historical trends, and fixed income investments are especially stretched in Japan and Europe with trillions of dollars of assets carrying negative rates.
“Asset allocation is now about choosing the least unattractive alternative, which leaves U.S. fixed income as default winner,” Rajadhyaksha said. “Ten-year U.S. yields are at historical lows, but still look attractive in a global context.”
The 10-year Treasury yield fell to a record low of about 1.33 percent on Wednesday as nervous investors continued to seek safe assets following the U.K. vote to exit the European Union on June 23.
That plunge in U.S. Treasury rates to record lows is a worrisome sign for stocks, he said.
“The bond market is screaming its lungs out with yields hitting new lows every day,” Rajadhyaksha said. “Risk assets are not pricing in downside risk.”
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