1. Home
  2. The Big Conversation

Data Insights

The Big Conversation

Each week we examine major themes driving the markets and use Refinitiv’s best-in-class data to assess the risks and opportunities for investors. Powered by Real Vision.

The Big Conversation

Watch the latest episode

Episode 140

Are recessions defined by unemployment?

Published on: September 23, 2022 • Duration: 11 minutes

This week Real Vision’s Roger Hirst looks at the key role that US employment will play in defining the depth of a recession and the lows in the equity market. All recessions since 1970 have seen unemployment rise dramatically through the recession. So far, unemployment has not yet turned.

  • Rog [00:00:00] Last week. FedEx, which is often considered a bellwether for the economy, released a statement outlining the lack of visibility in earnings due to a slowdown in global growth. The stock dropped 20% intraday. Equity market bulls, however, highlight many contrarian indicators that are currently flashing a buy signal for the broad market. The swing factor will probably be the outlook for employment, but is that going to be more of a story for 2023 than for the rest of the year? That's the Big Conversation. Investors are generally impatient to see their thesis play out almost immediately. The bears want to see equities make new lows now before the end of the year, whilst the bulls are pointing to a number of contrarian technical factors that have been associated with some of the major market lows of recent history. Which of these outlooks transpires will be down to the evolution of inflation and the reaction of the Fed to that.

    Rog [00:00:58] Now, two weeks ago, we looked at how the Fed was caught between a rock and a hard place. If the Fed does too little, inflation could remain elevated. That would prevent growth from reaching a sustainable footing because the market would reprice rates even higher until inflation was under control. The Fed would still have to raise rates a lot further, and if the Fed does too much, well, that could create a nasty recession. And historically, prices have meaningfully fallen through the midst of a decent recession, because the recession has curtailed growth and demand. Since the 1970s, CPI has peaked either before or during a recession and then fallen thereafter. If we are in the midst of a US recession today, then this one is relatively mild by historical standards. We have had two quarters of negative GDP growth, but these could be prone to future revisions both up and down. The Atlanta Fed outlook for the third quarter has also been falling, but is not yet gone negative. And the economic drag has so far mainly been confined to households and small businesses. The headline ISM numbers have been relatively robust, indicating an expanding economy. That is still some way from recessionary territory, which is typically considered to be around 45 for this indicator. The ISM, however, focuses on large-cap companies with many overseas operations, and they have greater capability of offsetting or passing on the higher prices. When we compare the S&P Global US services PMI versus the ISM Services Index, we can see that the S&P Global version, which includes smaller businesses, is much weaker and has dropped into recession territory. And U.S. consumer sentiment remains close to the record lows and has been impacted by the unaffordability of many large ticket items. Inflation remains high and real wages are still negative, and this has been a drag on the household sector in the US, and in fact indeed many other parts of the world as well. High prices therefore remain an impediment to sustainable growth. Prices may have peaked in the US at 9.1%, but have not come down to levels that are acceptable to policymakers. At the same time, sentiment towards the US equity market is very poor. Active investors remain very bearish in most surveys. The Bank of America fund manager survey also shows investors have cash levels that are similar to cash levels seen during the steepest declines of the dotcom crash 20 years ago. The US market has also seen a significant amount of put buying in recent weeks and this is often considered to be a contrarian indicator. Many of these, however, have coincided with major expiries like December 2018 and March 2020, and this may have been a greater influence on the ratio than the actual sentiments of the market at the time. ISM manufacturing prices paid has also seen a significant five month decline, and this may well be a prelude to a decline in CPI. Jason Gopfert's Sentiment Trader, has calculated that since 1949 the S&P has been 10% higher after 12 months on 100% of the occasions that it has had a similar drop on the prices paid. Now that doesn't mean we won't see new lows, we did in 2009, but the lows may be close at hand according to this indicator. So should we expect more of a sell-off first? Well, as mentioned earlier, this may be dependent on the outlook for employment. And the key point here is that a U.S. recession usually occurs when there is a significant increase in unemployment. Now, these may be coincident, but one is never far from the other. If we look at initial jobless claims, we can see that recessions usually occur as the pace of initial jobless claims picks up. So far, claims have only just started to tick higher. Either we are not going to see a meaningful pickup in unemployment, or the main part of the recession is still ahead of us. But how far ahead? Well, employment is generally a slow moving beast at first, though, we do have a recency bias because of the speed with which things happened during March 2020. But that was a one off. A reversal in employment generally takes place at a much slower pace before accelerating through the recession. Again, the unemployment data suggests that we're either not going to get a proper recession or the big one is still squarely ahead of us. It may well be that the couple of quarters of slowdown that we've had this year is just the precursor to the main event. And this is where it gets interesting for the Fed. At the moment we're seeing CPI dropping a bit because of a pullback in prices that were initially influenced by higher commodities and the excesses of the pandemic response. But commodity prices are not the main concern of the Fed at the moment. They're going to be concerned with wages. Real wages have so far been negative. Workers are worse off, hence the recession in the median household that's taking place in many regions. But workers are now demanding better wages and ones that beat inflation. In the US, the National Carrier's Conference Committee for Freight Rail Workers have been putting together a 24% pay deal over a five year period. With over 14% of that in the first year and the rest spread out over the next four years. Now it's still early days, but if these types of deals become commonplace, then higher wages could lead to much stickier inflation. So far, the absence of inflation busting pay deals has meant that many large corporations have been able to hang on to decent margins. But if these deals start to come through, companies will either see margins fall or they'll have to cut workers. And that's when unemployment starts to pick up and that's when we generally see the main part of the recession. So far as we've seen, unemployment has remained very tight, partly due to the legacy impact of COVID still working its way through the system, and partly because many corporates have not yet felt the pinch. And this might be how we get the real low in the equity market. At the moment, we've seen active fund managers getting bearish and raising cash to near record levels. But so far, the redemptions have not yet arrived. According to the Bank of America survey, the rolling two years sum of household equity flows remains positive. There have not been any major outflows yet, and according to the Twitter site Macro Charts, the three month flow of major stock ETFs in the U.S. is still in the 'fear of missing out' stage of inflows. There's not yet been a major capitulation event. And although the tweet I'm referencing here is from three weeks ago, it's unlikely that much has changed since then. And this makes sense if the jobs market remains strong. It's commonplace for the final quarter of the bear market to be the most aggressive, and this usually takes place through the middle of a recession. Equities are sold for liquidity to offset jobs that have been lost or on fears of greater job insecurity. Again, if the recession is ahead of us, the relationship between recession and equities suggests that the major market lows are also ahead of us. The question is, have we had our real recession yet? Therefore, it looks like it will require a pickup in unemployment to trigger the type of correlation event that sees all assets sold into the low of the equity market. Now, obviously, it may be the Fed communication that causes the recession that leads to lower lows in stocks. But so far this market has been very well behaved because there's been no panic selling or redemptions of note. The VIX has been high, but it's not been excessively so and has largely been tracking the actual volatility of the underlying market rather than registering real fear. Furthermore, active managers have been hedging their portfolios which have fallen in value due to the decline in the market, but have not yet seen significant assets withdrawn by end clients. If the cost of using options to hedge portfolios is at fair value and the asset managers still have significant assets to hedge, then this may explain the increase in put options premiums that we've seen this year. It may not be the contrarian indicator this time around.

    Rog [00:09:25] But maybe employment will remain robust and not deteriorate in a meaningful way. And that's one of the key arguments behind the soft landing scenario. But that's also the rock and the hard place for the Fed. If employment stays robust, then demand will keep prices and wages elevated, creating a drag on growth that will eventually require the Fed to be even more aggressive. The Fed may need to engineer a recession in order to drag prices back down to sustainable levels. So will the Fed be pre-emptively aggressive now and take interest rates to stifling levels that generates a swift recession this year? Or will this be a story for next year when inflation-beating wage increases start to become embedded in the system? But it may be prudent to have a few upside hedges in place here via index calls in case employment either doesn't deteriorate or takes a few months to do so. Large cap corporates may be surprisingly resilient in the meantime. The FedEx statement last week on lack of visibility suggests the slowdown may be on the near horizon, but employment appears to be that key variable. No change and the Fed may have to go even harder on the rate hikes. But if employment starts to pick up, then history suggests that the bulk of the recession is still ahead of us. And if that's the case, then the redemption activity that usually accompanies a major low in the equity market is still the most probable outcome that we may have to keep our powder dry into 2023 for that to play out. Being patient is hard in a world where information is so immediate, but bear markets used to play out over many months rather than a few weeks. We've been used to the Fed reversing course over the last 20 years to support equities, but right now they are still gunning for prices. And that means the reversal from them is unlikely until unemployment has genuinely picked up. 

Deep Dive Interviews

How are the capital markets changing?

Published on: January 8, 2022 • Duration: 15 minutes

In this episode of Deep Dive Interview, Roger Hirst speaks with Murray Roos, Group Head of Capital Markets at LSEG. Together they dive deep into the world of capital markets, discussing London’s role in the markets as well as the incredible new developments taking place.

Find out more: https://lseg.group/3q8eaT4

  • Roger [00:00:00] Today, I'm going to be talking to Murray Roos, who is the Group Head of Capital Markets at LSEG. We're going to be looking at London's place in those capital markets, some of the incredible developments that are going on and the speed of those changes. My own experience with Murray goes back a long way we used to work together at Deutsche Bank, so it's great to catch up with them once again. Indeed, hi Roger. In trading you've been from emerging markets all the way through to running the whole trading desk and then the equity product itself, which is a great stepping stone into capital markets and the institution of capital markets. How did that transition come about? What were the benefits of it? And what are your responsibilities now?

    Murray [00:00:42] Well, thank you, Roger. My responsibilities at the moment are, as you say, the capital markets businesses of the LSEG Group. We've just completed the Refinitiv transaction in 2021. And so our responsibilities include the equity venues of London Stock Exchange and Turquoise, as well as the fixed income and FX venues that have come by way of Refinitiv. So FX all and FX matching being our premier effects platforms and then albeit slightly arm's length, trade web being the fixed income platform that the group has a majority stake in.

    Roger [00:01:16] And over the last couple of years, it's been an incredibly dynamic period that we've seen, obviously with the pandemic, but it's accelerated some structural events within the financial markets, particularly the capital markets. What have been those biggest structural changes?

    Murray [00:01:31] I think that the pandemic really has created a pressure cooker out of the capital markets, and out of out of that has come a very strong trend of digitisation. I think that as we've worked remotely, as we've sought to raise capital remotely, and as people have looked at the way they interact with financial markets, we've taken a real step change in digitisation from everything from electronic trading, to electronic capital raising, right down to the way we communicate. Another very, very strong trend has been the growth of retail. I think increased amount of disposable income that people have had as a result of not travelling and have not not spending in their usual ways, has put more money from the retail market into investment. We've seen that we've seen that trend very strongly across the globe, including our markets. And then finally, I'd say probably not the start of a trend, but the acceleration of a trend culminating now with COP26 earlier this year, is the trend towards ESG. We've got more and more funds under management following ESG and a lot of very, very good innovations in the ESG space.

    Roger [00:02:45] And over the last 12 months, we've seen this real acceleration again in almost everything to do with capital markets, to do with finance. What has been the biggest trends that we've been seeing through London and just generally within capital markets over those last 12 months?

    Murray [00:02:57] The last 12 months, in fact, the last 18 months have really been quite spectacular from a capital raising perspective. As I think about 2021, so far, LSEG has done over 110 IPOs, raising over 16 billion pounds and a multiple of that in follow on issuance. So there really has been very good conditions for capital raising of late. When I look into that tech, as you might expect, has been a very big driver of that. We ourselves have had over 40 per cent of our IPOs being tech or tech enabled companies, which is which is something that not a lot of our market participants recognise the London Stock Exchange as, as being a tech driven market, and we certainly are seeing a big increase in tech companies in our market. Also, alternative assets, more than 25 per percent of our follow on capital issuance has been directed towards alternatives such as infrastructure projects, property, even things like music IP, which we raise capital for via our fund segment. And then again, very strongly within ESG. We've done over 100 green bonds this year, raising nearly 50 billion pounds. We're leaving us with over 300 green bonds on our market at the moment, and that trend is set to continue.

    Roger [00:04:21] Digitisation, I mean, this is something which, you know, it's it's a mega trend. It's it's all pervading, but what does that really mean for investing the way people look at markets? What is this digitisation trend doing? And what are the sort of core trends within it?

    Murray [00:04:35] Well, there are a number of facets to it, as you might expect. One of them is using digital techniques to make the investment process simpler, cheaper and more transparent. We have built a business called Issuer Services, where we seek to help digitise a lot of the previously analogue parts of capital raising, things like; investor roadshows, trading and corporate results presentations, analyst presentations, are all moving quite quickly from being purely face to face to being a hybrid between face to face and digital. So we've seen a strong growth in that, partly through necessity, during the months of COVID, but a lot of that is stuck. In terms of investors preferences as to how they like to go about raising and investing in capital, also, the actual access of the markets has become a lot more digital. You know, we talked a little bit about the growth in retail. Retail participants are increasingly participating in markets more digitally, sometimes directly from their phones now. That is a trend that will, will will continue. Another thing that is perhaps a little bit further off, but I think incredibly pervasive, incredibly transformational is digital assets and distributed ledger technology as an infrastructural play for the way capital markets evolve over the next 10 years. Things like tokenization, the creation of digital securities, the settlement in a digital fashion are all developments that people are starting to work very hard on now for, for the evolution of our capital markets

    Roger [00:06:17] And the retail, which in the US has exploded, and you're saying it's growing here and the digitisation, presumably that's kind of helping to democratise the whole market because it's about accessibility as frictionless access to markets. So the retail that you're seeing, what's been the real trend behind that and is this sort of everybody or is this, you know, the one percent, what sort of people are really driving this trend?

    Murray [00:06:38] Well, you're very right to call out the democratisation of retail. You know, perhaps if I can just give one example, there's an app here in the UK called Primary Bid, which allows retail participants to subscribe for IPO allocations at the same time and at the same terms as institutional investors. And this was something that never really used to be possible in years gone past. That has been incredibly popular over the last year to 18 months. And we're seeing that just continue to grow. So giving retail participants access to financial markets on the same terms as institutions, is a is a real leveller in that in that trend and that democratisation.

    Roger [00:07:19] And is that helping to presumably increase the depth of the market because suddenly you've got this whole new entrant coming in with, you know, small pockets, but little and often types of cash, and they must be alongside the institutions really helping to broaden out liquidity and opportunity.

    Murray [00:07:34] That's right. You know, one of the things we've seen in the U.K. in Europe relative to the US and parts of Asia is a much lower retail participation in stock markets. And that's a trend that we as market practitioners would really like to see change. We are seeing the green shoots of that change, but you're quite right. As more and more retail participants enter the market, depth of liquidity, tie between investment and brand loyalty and a lot of other really positive connexions are possible.

    Roger [00:08:05] And some of the retail in some ways, the large segment of the retail is quite a young demographic, and that young demographic is also very much behind a lot of the push towards sustainability and ESG. And what's the sort of trend that you're seeing within ESG is that one of the ones is burgeoning at the moment as well?

    Murray [00:08:21] Absolutely. I mean, ESG really is gaining an incredible amount of momentum, with the expectation of over 50 trillion, um, following ESG by 2025. It's just an it's it's an asset class in itself that can't afford to be ignored. You know, if I were to look at Green as a sector on the London Stock Exchange, it would have been our fourth biggest sector of capital raising in 2021. That's just on the equity side. And when we look at the bond market, the bond market is really on fire from that perspective. So that trend is really, really strong and continuing to grow

    Roger [00:08:58] and within the bond market, what are sort of things that people are doing there because it's sort of, you know, people nearly always think about the companies, the solar companies, et cetera, the equity. But the actual fixed income markets are becoming an increasingly important part of this whole trend as well.

    Murray [00:09:10] For sure, we've seen a number of sovereign green bonds from many, many sovereign institutions around the world for infrastructure projects in their respective countries. And then also, very importantly, we're seeing the growth of the voluntary carbon market, both for equity and for fixed income investments. LSEG itself launched the voluntary carbon market at COP26 last month. With the beginning of this month, I should say. And we see that as an incredibly powerful vehicle for infrastructure projects to raise funding. Are they in debt or in equity format to fund a number of these, a number of these projects around the world?

    Roger [00:09:51] Many people will be aware of the sort of carbon futures market. But so what is the structure very briefly of those voluntary carbon markets?

    Murray [00:09:57] I think a very good way to look at it is our offering seeks to solve the primary market problem, the actual raising of the capital to invest in infrastructure projects that give rise to carbon credits. LSEG is, as always, an open company, and our goal is to provide the infrastructure to allow us to then, have a number of other exchanges, a number of the markets trade those carbon credits and verify those carbon credits. So our purpose with with the voluntary carbon market is to facilitate the raising of the capital and the funding of the of the infrastructure projects in a transparent, sustainable and responsible way.

    Roger [00:10:39] And you talked about these trends in digitisation trends. We talked at the very beginning about how dynamic it is. I mean, this is incredibly fast paced. How does an institution like LSEG keep pace with these, with these trends because they're moving so quickly that even hard for experts to keep up? So what is LSEG doing in order to be ahead or be on top of these, these this wavefront as it were?

    Murray [00:11:02] That's one of the things that you know to your earlier question about what attracted me to LSEG, that's one of the things that I was attracted to by LSEG, is the position that LSEG occupies within the market, from its brand to its credibility to its network, is such that we have the opportunity to work with and partner with, some of the smartest minds in the world. Our open philosophy allows us to partner commercially or partner via equity stakes in some of the smartest and some of the fastest growing organisations in the world. And this, I find, particularly exciting and particularly attractive. And so by partnering with early stage companies that are really pioneering in this space, we're able to stay abreast of it. We're able to stay innovative and agile on our feet, and we're able to get to the right solutions for our client and for the market.

    Roger [00:11:54] And so going forward, I guess what you're looking at there, is sort of by being sort of being an open forum for both capital and for corporates to come together, is that allowing LSEG and London as a as a as a locations of geography to evolve with these megatrends? Because ultimately, what we're talking about with all of this when we're talking about ESG, retail, digitisation, these are some of the biggest generational megatrends that we've ever seen. They're all coming together now and there will be with us for the next 10 years. How do you see London and the institutions of London evolving in this space?

    Murray [00:12:24] That has been something that the institutions of London, London ink, so to speak, has been focussed on very strongly over the last over the last number of years, but very specifically over the last year or two. Obviously, with a catalyst of Brexit, this has focussed our minds on it and between our regulators, between a number of the think tanks around evolution of our rules and regulations of capital markets. We've made, I believe, a tremendous amount of progress in, in a short period of time to make sure that London stays competitive and London evolves with the best of the best around the world and markets. And I think just in 2021, we've seen outcomes of the Hill review and the Khalifa review that has sought to tackle our reaction to some of the evolution that we've seen in capital markets around the world. And I've been very impressed by the way all the various different stakeholders have come together to to maximise that and to and to ensure that our markets go forward and the proof of the pudding is in the eating. You know, with the exception of the US and Greater China, we have managed to raise more capital than any other market or any other constituency. And that trend seems to be continuing.

    Roger [00:13:36] So for outsiders basically what really is happening here is we're seeing some incredible transition. So people are probably still thinking, you know, old school institutions, old school corporates. But actually what we're seeing is very much a London and LSEG, which is a transitional, transformative area where we're seeing the biggest developments of things like digitisation all coming together, happening fairly rapidly and a great opportunity for investors to come along for that ride. Absolutely. Well, thank you very much. That it's great to hear that, london's very, very much an exciting place for investment and for capital markets.

    Murray [00:14:07] Thank you, Roger.

    Roger [00:14:09] I think what we've heard there is just the importance of convergence and the importance of retail. This is where retail and institutions are coming together. Corporates and capital are coming together, megatrends are converging and we're seeing this happening at breakneck speed. It is an exciting time to be in capital markets, and it looks like it's a very exciting time for London and in particular the institutions of London and LSEG, very much at the centre of that change. 

3d rendering of voice recognition system blue backround
The Big Conversation flash briefings

Find out how to listen to The Big Conversation on your Amazon Alexa or Google Assistant

Join the forum

Request access to the Global Markets Forum

Access to the GMF is free and exclusive to Eikon subscribers and Refinitiv Messenger standalone users. Please register for access using the form below. 

Want to trial Eikon for free for a month?  About Eikon.

How we use your data
Your personal information will be used for the purposes of reviewing your request to join a Refinitiv Messenger forum. If your request is successful you will be subscribed to the requested forum.