The likely result of a “no landing” macro environment in the first half of 2023 is a “hard landing” for the US in the back half of the year.
That was one message from BofA’s Michael Hartnett who, in the latest installment of his popular weekly “Flow Show” series, suggested stocks may suffer a meaningful drop over the next few weeks.
Despite 450bps of Fed hikes in just 11 months, US retail sales are at record highs, the unemployment rate is at a half-century low, the economy is adding jobs at a torrent pace and both CPI and PPI are reaccelerating. The implication: “The Fed’s mission [is] very much unaccomplished,” Hartnett said.
That’s not lost on the Fed, and it isn’t lost on the dollar either. The greenback is… well, it’s back+. Terminal rate pricing is now looking to make a run above 5.25%.
“The FX market entered February in search of a new theme, as those which had dominated for most of the last year were getting stale,” SocGen’s Kit Juckes remarked. “Absent a genuinely new driver, we have seen strong US data push up pricing of terminal Fed funds and the dollar has reverted to rising in sync with real rates.”
Although pricing for the Fed’s March gathering still suggests traders doubt the notion that policymakers will be willing to return briefly to 50bps hikes, there’s absolutely a case to be made that recent data, if “confirmed” next month, will prolong the hiking cycle.
“We say H1 2023 ‘no landing’ equals H2 2023 ‘hard landing’ for markets and macro,” BofA’s Hartnett, who weeks ago made the “no landing” case, wrote. No landing means higher rates, and that’ll eventually bring the hard landing story back, he went on to caution.
Fed tightening “always breaks something,” Hartnett reminded investors, dusting off an annotated visual he employs from time to time.
He also warned that recent “violent narrative flips” — from imminent recession to immaculate disinflation to now CPI and PPI accelerating anew — are “shredding Fed and government credibility.”
As for stocks, Hartnett said a failure of the S&P to break a “ceiling” at 4,200 “means [a] swoon to 3,800 by March 8” is likely, particularly in the event the data continues to suggest the US economy isn’t inclined to cool off absent a more aggressive policy response.
Leave it to Mike Hartnett to shine light on a significant dose of reality! Yes, “Fed tightening always breaks something.” But the animal spirits impulsively seek any news bits that justify desired or imagined outcomes. The thing is the US economy, with the exception of the 2008 financial crisis, has in the last 30 years, had a certain assured resilience for years upon years during the time of globalization.
Sounds like the CPI and PPI shredding the Fed’s credibility is not a good thing. What the Fed will say and do, and how they say it and do it, will probably take on even more importance in the meantime.
I doubt Jerome Powell will drown the market in bad news. But he will splash cold water. It’s always a process of fits and starts before the engine really gets going. And the quality of the road certainly matters too. There’s a lot happening in our world. But it’s the only world we have. Like it or not, we all need to keep our powder dry and keep our minds clear.