If recession fears weren’t acute enough headed into this week, the first contractionary ISM manufacturing print in three years served to spook markets further on Tuesday.
The 49.1 reading for August missed even the most pessimistic estimate from 65 economists surveyed (the range was 49.5-52.5) and new orders fell to 47.2, the lowest in seven years.
One of the most pressing risks at the current juncture is that incessant recession banter contributes to the self-fulfilling prophecy that’s got Mary Daly concerned. Trump isn’t helping by insisting there’s no recession on the horizon nearly every day on Twitter.
In a new note dated Wednesday, SocGen’s Alain Bokobza underscores how hard it is to escape the cacophony.
“The challenge today while reading financial research (or newspapers) is to find a note that doesn’t mention the dreaded R-word”, he writes, before implicating himself in the loop. “I managed to write barely two lines without having to use it”.
A quick look at a Bloomberg story count chart for the keyword “recession” tells you a lot, but in case you want another indicator, Bokobza notes that “the most remarkable evidence of ‘recession-talk’ being dialed up to eleven is the SG US economic newsflow indicator” which is “approaching levels seen during the troughs of the last two recessions”.
In fact, Bokobza continues, “reading the news would suggest that the US is already in recession despite the largest equity benchmark in the world (S&P500) being just c.4% off all-time-highs”.
Of course, the juxtaposition between dour-sounding headlines and the S&P is mirrored in a chart of stocks and US yields, with bonds screaming recession although, as noted here on countless occasions last month, and as mentioned by SocGen on Wednesday, “the US Treasury curve may have been pulled around by technical factors including convexity hedging”.
SocGen goes on to say that bond pricing is “on the cusp of moving from ‘insurance’ to recessionary cuts”.
“Up to three 25bp cuts being priced in is historically consistent with mid-cycle slowdowns”, the bank says, explaining the orange demarcation line in the chart.
What happens when the market starts to price in more than three cuts? Well, nothing good, usually.
“As bond market pricing transitions from ‘insurance’ to recessionary cuts, equity volatility eventually picks up in sympathy with increased uncertainty around economic growth”, SocGen cautions.
Amusingly, this suggests that the White House is right on the edge of pushing things too far when it comes to badgering the rates market into pricing in Fed cuts. One more shove and bond pricing will send a warning sign to equities that we’ve moved from “insurance cuts” to “recession cuts”.