If you’re a thrill seeker, “CPI eve” sessions in the pandemic era can be tedious affairs.
To be sure, a lot of the drama has come out of the inflation prints since last year’s panic, but trading is still cautious and conviction minimal ahead of the monthly CPI releases. When you combine that with the lethargy that goes along with the dog days of summer, you can get a listless drift. No thrills to be had. “A prime day for range-trading,” as BMO’s Ian Lyngen and Ben Jeffery put it.
In the absence of meaningful market developments, headlines were dominated by Sweden’s NATO ascension (which the incorrigible Recep Tayyip Erdogan finally blessed) and Ukraine’s bid to get under the umbrella such that the rain of Russian missiles in any future conflict would fall on alliance soil, compelling a direct military response from the coalition. In hindsight, NATO’s pre-war approach to Ukrainian ascension amounted to the worst of all possible strategies. Proposing membership, even in the vaguest of terms, gave Vladimir Putin an excuse to claim Russia was menaced by the alliance, but not following through suggested to the Kremlin that NATO was noncommittal — that Kyiv might be expendable. So, here we are, staring at a ground war in Europe and the prospect of a global conflagration.
A summit communiqué released on Tuesday reiterated that “Ukraine’s future is in NATO,” but the language wasn’t specific enough for Volodymyr Zelensky, who called the conspicuous absence of a timeline for membership “absurd.” “We will be in a position to extend an invitation to Ukraine to join the Alliance when allies agree and conditions are met,” the communiqué said.
As for markets, it’s the same story. Macro watchers, economists and clairvoyants of various sorts continue to ponder the odds of a US recession which, according to the infallible yield curve, became a foregone conclusion a long time ago. The re-steepening from post-Volcker inversion extremes triggered by March’s regional banking crisis allegedly sealed the deal (remember, it’s not the inversion you should fear, but rather the re-steepening). And yet, here we are, staring at a bulletproof US labor market and an economy that refuses to so much as convincingly bend, let alone break.
Indeed, the US economy is so resilient that good news is now bad again, as evidenced by last week’s price action. “Last week provided an overview of our concerns amid a market reacting badly to strong economic data points,” SocGen’s Andrew Lapthorne said. “Interest rates are a blunt instrument, and with large-cap equities not particularly leveraged, damage will likely either come from 10-year bond yields rising and hurting what are expensive valuations or excessively high interest rates triggering leverage problems appearing elsewhere and creating a harder landing.”
For now, though, no US assets are priced for a recession. Or at least not according to JPMorgan’s model, which looks at the “historical behavior of different asset classes around past recessions [and] assumes that, at market peaks, no chance of a recession is priced and by the time we reach the market bottom, the recession is fully priced.”
As you can see from the figure, only commodities are “predicting” a downturn. JPMorgan finds that incongruous on a number of levels. “The postponement of US recession risk has induced investors to abandon recession trades, especially negative carry recession trades in the fixed income space,” analysts led by Marko Kolanovic remarked. “The result is that, outside of commodities, markets now broadly price a low probability of recession, while our base case remains that a US recession is likely to begin near year-end.”
On Tuesday, WTI rose above its 100-day moving average. Even some commodities are finding their footing again, despite ongoing concerns about the outlook for the Chinese economy, which has lost its way entirely.
Wednesday will mercifully inject some excitement into what otherwise feels like an increasingly sleepy July trade, or at least to me, coping as I am with stifling heat and a summer sun so unforgiving that local dogs can no longer walk on the pier because the ground is too hot for their paws in the early afternoon. There are armadillos here now too, by the several hundreds from what I can tell. That’s a fairly recent development. They tend to roll over and die in the middle of the street, which gives the whole scene a kind of nightmarish feel, particularly when the thunderstorms come rolling in and wash the bodies down the road, creating piles of giant, recently deceased rollie pollies in sandy trenches.
“Between CPI and the full docket of Fedspeak on Wednesday, this week could end with a much different tone than that which was set in the wake of payrolls — or more specifically, in the run-up to the official BLS report,” BMO’s Lyngen and Jeffery went on to say Tuesday. “Whereas jobs were assumed to be bond bearish, the potential for easing inflation numbers is being read as constructive for duration.”
As for equities and risk assets more generally, JPMorgan’s Kolanovic called the “benign” recession pricing illustrated above an example of complacency, before cautioning on “increasing signs that a credit cycle is emerging.” The bank is now “more negative” on credit and “more positive” on government bonds.
