How Long Will Consumers Keep Spending?

We speak with ClearBridge Investments’ Jeff Schulze about a topic on many investors’ minds: the 10-year US Treasury yield and the path of monetary policy. He also shares his views on the latest US retail sales data and whether consumer resilience will last into 2024.


Host: Welcome, Jeff. We’re excited to have you here in the studio today.

Jeff Schulze: Thank you for having me.

Host: Jeff, let’s start off by talking about one topic that is on every investor’s mind today, the 10-year Treasury yield. Over the past four months, yields have risen dramatically in response to better-than-expected economic numbers but have cooled in the last week or so. Have bond yields in the US peaked?

Jeff Schulze: Well, obviously that’s an interesting question. It’s been driving the returns that you’ve seen in fixed income. It’s been driving the equity markets really since late July. I do believe that we’ve seen the peak of the 10-year Treasury. Now the reason why I say that is, if you look back to the prior 10 tightening cycles, back to 1971, unlike the dollar or equities or credit, no matter what happens with the economy, the 10-year Treasury tends to peak in line with that last Fed [Federal Reserve] hike. Now, sometimes it’s a little bit earlier; sometimes it’s a little bit later. And the latest that the 10-year Treasury peaked after that last rate hike was five months after the 1981 tightening cycle. But it tends to peak with where we are currently at. And if we look at July as the last rate hike (and I do believe that that is the case given the slowing economic momentum that you just mentioned with manufacturing and services PMIs [Purchasing Managers’ Indexes] surprising to the downside, a weaker employment number that we got here with October), we’re really kind of at that extreme level of where you’d see the 10-year Treasury peak. So, with our expectations of weaker economic activity as we look out on the horizon, I think the path is likely going to be lower for the 10-year Treasury, which will be obviously a nice tailwind for fixed income portfolios, but also a nice tailwind to equities.

Host: Okay. So Jeff, we just moved through the November FOMC [Federal Open Market Committee] meeting with another pause. You just mentioned that you believe that that is the last hike that we’ll experience. Do you think it’s too premature at this time to even be talking about cuts?

Jeff Schulze: I do. Although the Fed is going to be higher for longer, they want to see what all of their hiking has done to the economy, and we’re just starting to see the economy slow. I think it’s premature to talk about cuts because, quite frankly, the Fed did not want to repeat the policy era that you saw in the late 1960s when they created a soft landing and they pivoted with a really tight labor market. That really kind of kicked off the structurally higher inflationary period that you saw in the 1970s.