It Didn’t Last

It didn’t last because it couldn’t.

The bid for risk catalyzed by the Bank of England’s emergency intervention in the UK bond market fizzled Thursday, as US yields resumed their upward march and the curve bear flattened.

It was just as well. Wednesday’s rally was counterproductive for a Fed bent on engineering tighter financial conditions. In all likelihood, US policymakers were displeased with the sugar high from the BoE’s pension rescue operation.

The S&P gave back all of the prior day’s gains — and then some. The Nasdaq was lower by more than 3% into late afternoon trading, the worst day since August’s CPI report sparked a rout (figure below).

Apple dropped sharply amid demand concerns, dragging down the broader market. The shares were on track to fall 6% for the week, the worst showing in months.

Shares of the company formerly known as Facebook fell nearly 4%, as Mark Zuckerberg reportedly told employees Meta will freeze hiring and implement a team restructuring initiative in a bid to cut costs and, one imagines, cut losses, which have piled up for the shares since Zuckerberg’s infamous pivot to the metaverse.

He blamed, in part anyway, the macro outlook. “I’d hoped the economy would have more clearly stabilized by now, but from what we’re seeing it doesn’t yet seem like it has, so we want to plan somewhat conservatively,” he remarked.

Meta sounds like it’s moving forward with previously tipped plans to reduce headcount. Zuckerberg employed an absurd euphemism while discussing the soon-to-be unemployed. Meta, he said, will “manage out people who aren’t succeeding.”

Forgive me, but one person who you might fairly suggest isn’t succeeding is Zuckerberg himself. Or at least not according to the stock (figure above).

Facebook never really recovered from catastrophic losses incurred in February, when the shares suffered one of the largest single-session value destruction events in US market history (figure below).

As Bloomberg put it, summing up, “the further cost cuts and hiring freeze are Meta’s starkest admission yet that advertising revenue growth is slowing amid mounting competition for users’ attention.”

Fed speak was hawkish, as expected. Jim Bullard suggested the outlook for the US economy won’t be materially affected by drama across the pond. “This is mostly about financial markets needing to price in the volatility that you’re seeing in the UK, so we have some movements in the US because of that,” he told reporters, over the phone apparently. “I don’t see this really impinging on US inflation or real growth developments.”

Meanwhile, Loretta Mester said rates still aren’t restrictive in the US. The Fed, she said, isn’t at a point where officials should consider a pause. A recession, should it occur, wouldn’t stop the Fed from hiking rates, Mester emphasized.

I could go on. And believe me, I’m tempted to. But I fear there’s not much left to say. The BoE’s intervention was designed to address a specific problem (a potential crisis for UK pension funds), not lift global risk assets out of a bear market. Nothing has changed. The macro picture is foreboding, the Fed is hawkish, inflation is high and a war is raging in Europe.

Commenting Thursday afternoon on recent meetings with clients, BMO’s Ian Lyngen and Ben Jeffery said one key theme was dollar strength “and the fact that resulting strains haven’t been limited to emerging markets.”

“A coordinated effort by the G7 to depreciate the US dollar shouldn’t be taken completely off the table, although the path to execution has already proven challenging,” they wrote, adding that “on net, there’s a great deal of investor (and strategist) uncertainty at the moment as global policymakers continue pushing the restrictive rate regime.”

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3 thoughts on “It Didn’t Last

  1. Revised U.S. government figures confirm the U.S. shrank in the first six months of the year. GDP, the official scorecard of the economy, fell at a 0.6% annual clip in the second quarter, the BEA said, revising the figures. Some economists had speculated the revised numbers could show growth instead of contraction. Instead there was very little change.

    Political partisans are arguing over whether the U.S. has slipped into recession. The old rule-of-thumb defines a recession as two consecutive quarters of negative GDP, and yet, the strongest labor market in decades signals the economy is still in expansion mode. Businesses are hiring, layoffs are at a record low and the unemployment rate is near the lowest level since the 1960s.

    Public sentiment is everything. Is it GDP, or jobs?

    From my observations – it appears that for some, recessions can be defined by the old but informal rule-of-thumb (GDP) or the labor market. And for others, recessions begin on the day their preferred political candidate for the presidency loses an election – and the recession continues for years, until the day their preferred political candidate for the presidency wins an election.

  2. It’s pretty clear that the business world believes the US has entered a recession and they’re trimming investment/spending which, just like the Fed hiking and QT (and not even at neutral yet), will take months to show up on Main Street, but can have only one outcome.

    I’d say the job market looks like the Boomers demographic change being pulled forward by the pandemic (also affected immigration) which is obscuring the traditional signals, but ironically without a huge increase in productivity per worker I can’t see how GDP will grow with less people working.

    1. Anon – I’d say your assessment of the Boomer demographic changes in the job market is right on. Good point to make right now. Thanks for adding to my perspective.

      I suspect the US is on the outside edge of a global recession that has already begun, and the US will not be able to avoid being impacted by it through most of 2023. I’m hoping we start to see signs of its ebbing 12 months from now.

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