One of the key macro-market talking points headed into this month said benchmark equities (i.e., stocks at the index level) came out of August disconnected from rates, FX, commodities and even from their own internals in terms of pricing economic slowdown risk.
To my mind, the best illustration of that disparity was (and still is) the S&P plotted with 2024 Fed-cut pricing.
Regular readers will recognize the figure below. I’ve inverted the S&P so you can better visualize the ostensible tension.
Stocks traded down sharply early last month in response to the renewed (and acute) growth concerns which rates traded as a clarion call to the Fed. Although equities quickly recovered, the majority of the rate-cut premium added across August 1, 2 and 5 remained in the curve. That left the equity rally disconnected from STIRs.
On the right-hand side, you can see this week’s equity pullback coincident with another blast of dovish price action in rates. “Bad news is bad news.” But with the S&P still perched at 5,500 — which is to say within ~3% of record highs — the incongruity with Fed pricing remains.
As Morgan Stanley’s Mike Wilson noted in his latest, that same discordance is apparent when you plot the S&P against commodities (WTI erased its YTD gain this week, for example), FX and cyclical underperformance.
That’s the context for the figure below, an updated version of JPMorgan’s recession probabilities as priced across various assets.
As a quick reminder, the bank derives those odds by comparing peak-to-trough moves for the current cycle with previous recessions.
Long story short, big-cap US equities (at the index level) and credit are pricing essentially no odds of a recession, while rates and (some) commodities suggest a downturn’s highly likely.
“The soft landing scenario is embedded in equity and credit markets,” Nikolaos Panigirtzoglou wrote. “In contrast, rate markets appear to be leaning more towards the recession scenario.”
So, stocks say “soft landing.” Economists generally do too. Bonds say “recession.” So do base metals. Who you gonna believe?
I generally believe bonds over stocks, because bond investors are methodical, gimlet-eyed, calculating machines while stock investors are squirrel-chasing, starry-eyed, feeling machines. Or so I always thought. But yields are moving around so much now, with market-implied cuts gyrating from five to none to four in the last several months, that I am getting skeptical of both. I’m treating base metals as more of a China indicator than anything else.
Those who have a front-row seat to the order books of major USA OEMs across multiple end-markets believe the Bond signals.
H-Man, the bond market never tells a tale.