Yellen Says No Recession... Market Responds with Defensive Stocks

[Image source=EPA Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Contrary to officials who say that the decline in U.S. Gross Domestic Product (GDP) does not indicate a recession, the market is responding by shifting to defensive sectors.

On the 28th (local time), the U.S. Department of Commerce announced that the U.S. GDP for the second quarter decreased by 0.9% (annualized rate). Following a decline of -1.6% in the first quarter, the second quarter also recorded a negative growth. Two consecutive quarters of decline are defined as a technical recession.

After the GDP announcement, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell sought to clarify that this is not a recession. They explained that jobs are increasing, household finances are solid, consumption is rising, and companies are also growing.

Researcher Kim Il-hyeok of KB Securities explained, "The employment figures cited by the two as evidence against a recession are the number of new nonfarm payroll jobs from the business survey," adding, "However, according to the household survey, the number of employed persons decreased by an average of 116,000 per month in the second quarter of this year." This closely matches the employment decline at the early stages of past recessions mentioned by Secretary Yellen.

[Image source=Yonhap News]

The biggest difference between the business survey and the household survey is whether independent contractors such as freelancers are included. Unlike the business survey, which only includes people receiving regular paychecks, the household survey includes independent contractors who do not receive regular pay but perform specific contracts and receive payment upon submitting invoices.

Researcher Kim pointed out, "Although the household survey has the disadvantage of a small sample size and high volatility, the fact that employment numbers in the household survey decreased in April and June over the past three months may indicate that the labor market is struggling to expand further."

He added, "Concerns about employment have already been raised in consumer sentiment indicators, and the weekly initial jobless claims announced yesterday returned to the mid-200,000 range," noting, "Therefore, it is difficult to definitively say that this is not a recession."

He further stated, "If policymakers judge that this is not a recession and thus feel less urgency to stimulate the economy, the economic slowdown could worsen," emphasizing, "The weekly initial jobless claims announced by the U.S. Department of Labor yesterday rose again to the mid-200,000 range, making it difficult to conclusively rule out a recession, contrary to Secretary Yellen's remarks."

[Image source=Yonhap News]

Reflecting this, the market is preparing for earnings concerns by moving into defensive sectors. The year-end benchmark interest rate forecast reflected in the Eurodollar futures market fell from 3.51% before the Federal Open Market Committee (FOMC) meeting to 3.36%. In the federal funds futures market, the probability that the year-end benchmark rate will be between 3.25% and 3.5% rose to 50%, while the probability of a higher rate declined. The 10-year U.S. Treasury Inflation-Protected Securities (TIPS) yield (real interest rate) dropped by 25.1 basis points compared to before the FOMC, interpreted as reflecting the possibility of a rate cut.

Researcher Kim evaluated, "As concerns about monetary tightening ease, stock indices continue to rise," adding, "Although the indices are rising, investors are preparing for a situation where earnings concerns may increase."

He diagnosed, "Looking at the performance by sector over yesterday and the past week, defensive sectors such as utilities and real estate showed the strongest performance," while "financials, consumer discretionary, and communication services sectors underperformed the S&P 500 over the past week."

He analyzed, "Currently, the decline in real interest rates is being interpreted as an 'easing of monetary tightening concerns,' but it appears to be a movement preparing for an interpretation as 'worsening earnings concerns.'"

This content was produced with the assistance of AI translation services.