DoubleLine Capital: Quarterly Outlook and Commentary September 2023

October 17, 2023

3 minute read

by DoubleLine Capital

The latest market commentary is now available from DoubleLine Capital - here are some of the key highlights in the report:

Highlights

Market Overview:
- Financial assets experienced a rally in the first half of the year, but there was a decline in both stocks and bonds during the third quarter.
- The S&P 500 Index saw a decline, especially in September.
- A significant portion of the equity market's gains in the first half was due to a small group of mega-cap growth technology stocks, which declined in the third quarter.
- Bonds also faced challenges, with the Bloomberg US Aggregate Bond Index declining. This negative performance in traditional fixed-income sectors was attributed to rising U.S. Treasury rates and hawkish sentiment from the Federal Reserve.
- Commodities, especially oil, experienced gains after OPEC+ extended production cuts through September.
U.S. Economic Data:
- The U.S. labor market remained tight, with the September nonfarm payrolls report showing the U.S. economy added 336,000 jobs, surpassing consensus estimates.
- The U-3 unemployment rate remained steady at 3.8%.
- The Job Openings and Labor Turnover Survey data for August showed an increase in job openings, bringing the ratio of vacancies per unemployed job seeker to 1.5x.
- Other U.S. economic data, such as the ISM Manufacturing PMI and ISM Services PMI, showed mixed results. The manufacturing sector remained in contractionary territory, while the services sector was in expansionary territory.
- August’s Conference Board Leading Economic Index indicated a decline, suggesting potential economic challenges.
Monetary Policy:
- If the Federal Reserve views the sell-off in Treasuries as a sufficient tightening of financial conditions, the end of the central bank’s policy tightening could be near. After a strong growth quarter for the U.S. economy in 2023, data might decelerate towards the end of the year, potentially putting restrictive monetary policy in conflict with a slowing economy.

What's ahead?

Federal Reserve's Stance: On September 20, the Federal Open Market Committee (FOMC) held the target federal funds rate steady at an upper bound of 5.5%. After 525 basis points of policy firming, Fed Chair Jerome H. Powell noted that the current stance of monetary policy is seen as restrictive, exerting downward pressure on economic activity, hiring, and inflation. The FOMC is not yet ready to declare victory in its fight to restore price stability. [Page 1]
Economic Projections: September’s updated Summary of Economic Projections (SEP) indicated a higher-for-longer narrative for interest rates. The median projection for the federal funds rate showed 50 basis points of cuts in 2024, down from the June SEP’s forecast of 100 bps of cuts. The updated SEP also reflected the Fed’s increased confidence in maintaining a restrictive monetary policy without causing significant damage to the economy. The path to a soft landing was described as "widening." The SEP was more optimistic than June’s projections for both employment and real GDP growth. The unemployment rate forecast for year-end 2024 was revised down to 4.1% from 4.5%, and real GDP was revised up to 1.5% from 1.1%. [Page 1]
Monetary Policy and Economic Growth: If the Federal Reserve views the sell-off in Treasuries as a significant tightening of financial conditions, the end of the central bank’s policy tightening could be near. After what is estimated to be the strongest quarter of growth for the U.S. economy in 2023, data could decelerate towards the end of the year. This might put restrictive monetary policy in conflict with a potentially slowing economy. [Page 2]