Earlier this week, I noted that major Wall Street banks are beginning to speak as though+ they believe the declining odds of a US recession might’ve kicked the can on the most widely-telegraphed downturn in modern history into the indefinite future.
In other words: That US recession which was part and parcel of every macro playbook headed into 2023 may not be coming at all, where “at all” means by the time it arrives, it’ll be too late to vindicate consensus.
The Atlanta Fed’s GDPNow tracker for Q2 stood at 2.4% as of July 19.
Inflation and wage growth may be moderating, but the Fed is avowedly after a below-trend pace of growth. I’m not sure we’re there yet.
In fact, and as Goldman suggested this week, growth is picking back up. On Friday, Nomura’s Charlie McElligott flagged a notable regime change in the bank’s economic quadrant analysis.
After taking note of the US and UK CPI downside surprises, Charlie pointed out that the inflation moderation is set somewhat precariously “against US growth reaccelerating, as FCI has eased in conjunction with [the] enormous wealth effect being created as securities portfolios explode higher, home values reaccelerate and real wages / earnings actually move higher.”
That’s all critical. Last week’s big drop in the dollar and accompanying slide in real yields materially eased financial conditions. At the same time, the dearth of resale inventory in the housing market and still robust demand from many buyers are combining to push home prices towards new record highs. US household wealth is guaranteed to show a surge for Q2 thanks to the stock rally. And as headline inflation recedes, elevated YoY wage growth means workers are getting real raises, where “real” can be taken in a very literal sense.
“This ‘growth renaissance’ can be seen clearly in our analysis, where in absolutely remarkable fashion, we see the cycle having emerged out of ‘Contraction,’ where it has been been embedded since November, and into the ‘Recovery’ quadrant,” McElligott went on.
As you might imagine, any continuation of this US “growth renaissance” has the potential to dole out some pain. A backtest run by Nomura shows outperformance for economic-sensitives.
“It’s clear that some investors are looking to take-up their cyclicality,” Charlie said, suggesting PMs may be “increasingly uncomfortable with being too weighted to duration-sensitives into a US economy which continues to hold the line.”
Could it be that 2022 bear market was simply reflecting the mini-seudo recession we already had? It appears to me a hard landing is still possible but only if the Fed over does their hiking for longer plan.
That should be “higher for linger plan,”
“Inflation and wage growth may be moderating, but the Fed is avowedly after a below-trend pace of growth.”
I think what the Fed wants, and what the Fed is willing to do to achieve it, are not matched. The Fed’s economists are like other economists, with the same data, models, and experience set, so they still think a recession is looming. The Fed governors have lost confidence in their models, fallen back on data dependency, and are afraid of creating a recession, so as long as inflation looks like it is ticking down, they will hold fire.
Just my opinion, and I have no more window into Powell’s mind than anyone else, but I’ve thought for a couple months now that the Fed has ceased being something that investors need to fear, which means that bubbles of over-exuberance have carte blanche to run.
Not forever – nothing runs forever – but basically if big tech earnings/guides are “good enough” then those stocks can keep running, and if cyclical earnings/guides are not “too bad” and the economy continues to upside then those stocks can start running.
I’m hoping it’s the latter, because you can still own some of those cyclical stocks without abandoning valuation discipline – mostly, anyway, and especially downcap.
Either way, the traditional defensive sectors are hard to own here, and ditto the names who’ve relied on high inflation for growth.
Clarify: by “hold fire” I mean just 25 or 50 bp more. Since that will bring FF > core PCE inflation, and Fed thinks rates are already restrictive, there’s little reason to think FF goes higher after Sept. I.e. Fed is about to leave the playing field.