Don’t lose the plot. And, unfortunately, this plot dead ends in recession.

That was one somewhat downbeat takeaway from a new cross-asset strategy piece from JPMorgan, whose Federico Manicardi and Thomas Salopek suggested that in the face of what I’ll call deafening macro noise, it’s best to trust the “late-cycle playbook.”

To say it’s been difficult to get a read on the US economy (or any major economy, for that matter) would be an understatement. Over the past three months alone, the US has gone from rip-roaring (in January) to fading fast (in March), and it’s by no means obvious where it’s going next.

The confusion is reflected in Fed terminal rate expectations. A run of scorching-hot data and Jerome Powell’s remarks to the Senate had traders pricing in the prospect of peak rates near 6%. Then came the bank failures.

On March 8, terminal rate pricing reached 5.86%. Three business days (and two bank failures) later, it was 4.95%.

That’s the kind of environment it is. Since the most acute days of the bank panic four weeks ago, the situation has improved, and terminal rate expectations have drifted back higher again. They’re now roughly in line with the Fed’s median dot, but that doesn’t mean markets and the Fed agree. The dot suggests rates will stay at terminal through year-end. Markets see at least a pair of cuts, if not more.

The point: It’s all very noisy. But, “despite the noise, a recession in the next 12 months should be a baseline,” Manicardi and Salopek said, adding that “even if a mixed macro backdrop is widening the tails… the message from our recession probability model as well as housing and [the] monetary space remains unambiguous.” That message: A recession is likely.

The figures above speak for themselves, and there’s certainly no shortage of recessionary banter about if that’s what you’re after.

Corporate profits are still hanging in there, but even that’s not quite right — we’re actually entering an earnings recession, the only question is whether it’ll be short-lived and shallow, or longer and deeper. Consensus says the former, but then again that’s what consensus always says, and that’s assuming you can herd enough cats to get company analysts to collectively predict a profit downturn in the first place.

Last month, JPMorgan’s Marko Kolanovic emphasized that not all carry trades can be bailed out. On Thursday, Manicardi and Salopek underscored the point — and then some. To wit:

After many years of low interest rates, something will likely break as policy stays restrictive. It may not be a straightforward process, as the recent period of falling yields can ease the tension. Ultimately, though, our view is that carry trades show up in many forms (CRE, auto loans, credit cards, etc), so it’s not possible to backstop them all. What has likely kept many of these afloat, thus far, has been the strong job market and the excess savings accumulated during COVID. The tight jobs market has prevented housing prices from falling further, as those with jobs don’t have to urgently sell into a weakening market. And healthy excess savings have helped maintain consumption. Both of these cushions are now eroding. And while companies have resisted layoffs due to the difficulty of replacing lost workers in a tight market, companies have in the past laid people off as profitability declines and profit margins compress. Finally, there is the debt ceiling, which can come into focus as early as May, once Congress has a look at tax receipts, which are expected to be disappointing given the drop in asset prices. All of the above are good reasons to be cautious, and let’s not forget that we have never managed to avoid a recession after such a large yield curve inversion. Hence, it is difficult to point to one specific catalyst to kick off the next downturn, but it is safe to say the stars are already aligned.

Duly noted.

I’ll just leave it at that.