“Uncertainty” was the word of the day, both in Powell’s testimony (he said “uncertain” more than two-dozen times) and in the account of last month’s meeting. “By our count, there were a total of 22 references to the word ‘uncertainty’ within the minutes, well above the number of references in previous meetings”, Barclays mused on Wednesday evening. “Moreover, several participants (that is, three to four) thought that the drag on the outlook from this channel would remain significant throughout the medium term”.
Goldman ratcheted up their subjective odds for a July cut to 75% on Wednesday night.
The question now is, of course, whether the Fed can head off an actual downturn with preemptive easing. After all, the mad scramble into risk assets (out the risk curve and down the quality ladder in search of yield) only makes sense if you believe central banks will be successful in preventing the global manufacturing slump from worsening and then spilling over into the services sector and eventually the labor market. In some respects, the global manufacturing “slump” could be described in recessionary terms.
Reconciling the “competing” signals from plunging DM bond yields and surging risk assets (e.g., stocks and credit) is only possible by reference to the expected effectiveness of the monetary policy response to the burgeoning slowdown (or else to the pricing in of a lower neutral rate, but you get the point). While it’s not “unusual”, per se, for stocks to levitate as bond yields fall, the dramatic plunge in yields across the globe seems inconsistent with the 20% YTD gain in the S&P, to the extent the bond rally is saying something about the outlook for the global economy.
“Whether the Fed’s dovish bias presents an opportunity to back up the truck and load it with any yield available (albeit at the cost of taking on board increasing levels of risk) or just a reason to sell the dollar, depends less on the Fed’s bias than on whether the FOMC’s ‘stitch in time’ will prevent a serious US economic slowdown, or not”, SocGen’s Kit Juckes wrote Thursday.
If you ask Juckes, “there are too many signs of slowdown to ignore, and the end of the cycle is more likely than a third temporary loss of momentum being followed by re-acceleration”.
Obviously, the yield curve agrees, and that’s a potential concern for Trump headed into 2020.
Suspicions that the end is nigh for the US expansion are also intuitive considering how long in the tooth the cycle is, but you’d be hard pressed to find anyone who’s willing to go out on a limb and make a US recession their base case, although the New York Fed’s recession probability indicator sits at its highest since 2008.
One supposes we’ll have to wait until next year – an election year, by the way – to find out whether the US economy finally succumbs, or whether words like “cycle” have ceased to make sense.
“My thinking is that this is probably the end of [the] traditional business cycle – no more big and ‘frequent’ amplitudes, but more like undulations around a flat line”, one strategist we spoke to in March suggested. It could be that there are no more recessions in the traditional sense. Just more or less of stagnation, this person said.
In the near-term, SocGen’s Juckes says “we may have to limit ourselves to seeing if the dovish Fed can drive 10-year Note yields back below 2% and if it’s enough to get the S&P to hold above 3000”.