“Soft landing” or “hard landing”?

The plane metaphors are a bit grating by now. As I put it last week, ubiquity is conducive to clichés, and that’s where we are with aeronautics, policy and macro.

Thankfully, BofA’s Michael Hartnett has a new spin on this otherwise tired debate. In the latest installment of his popular weekly “Flow Show” series, Hartnett wondered what might befall markets if the “‘soft landing’ narrative temporarily shifts into a ‘no landing’ view.”

Bonds are a bull story in 2023 because, in simple terms, it’s difficult to imagine things getting any worse after 2022. “Investors are acting on an attractive level of yields and the potential for capital return,” Hartnett said, of this year’s early bond rally. “Remember, Treasury returns last year were one of the worst in the past 250 years.”

So far, Treasurys are up around 3%, and the popular long-end retail ETF is 7.5% higher in January.

Maybe Zoltan Pozsar will eventually be right about tailing auctions forcing the Fed into QE, but if you haven’t noticed, this month’s auctions went swimmingly, all the way through Thursday’s seven-year sale.

But the case for bonds (and thereby for a return to something that’ll feel like “normal” for a generation of investors accustomed to outperformance by long-duration equities and a negative stock-bond return correlation) hinges on a number of key assumptions.

“The narrative holds so long as growth falls, inflation falls and the Fed is done at some stage,” Hartnett wrote, before calling the bull story “fragile.”

The scope for yields to decline may be “modest,” he said, considering the impact of China’s re-opening, escalations in the Ukraine conflict and “fiscal excess.” 2023 is set to see $6 trillion in government bond supply, which’ll need to be digested without the help of QE, and concurrent with $1 trillion in corporate paper.

“Recessions are about re-financings and redundancies,” Hartnett went on, noting that “monetary policy is struggling to create recession.” As noted here previously, US M2 is now contracting on a YoY basis, curves are deeply (anomalously, even) inverted and multiple leading indicators seem to be screaming recession and hard landing.

It’s worth noting (I guess) that a Bloomberg blogger recently tried to downplay the money supply contraction by reference to compositional changes. It was a reasonably trenchant critique, and it’s worth reading if you have terminal access, but I’d be remiss not to gently suggest that it felt belabored.

Anyway, if you ask Hartnett, “another tightening of financial conditions this spring may be required to tip a US economy currently growing >7% in nominal terms into the recession the consensus craves.”

In the meantime, he wrote, “the comeback of speculative long-duration assets [could] reverse” if oil and wages don’t cooperate, and “the ‘soft landing’ narrative temporarily shifts in the coming weeks into a ‘no landing’ view.”