Stocks look like ending the week on the back foot after a recent batch of stronger than expected economic data triggered further hawkish Fed chatter.
This is not a great scenario for the “pessimistic bulls”. That’s what Gavekal Research’s chairman and chief economist Anatole Kaletsky calls those investors who consider themselves “cautiously pessimistic because they anticipate an early U.S. recession”.
In fact, he adds, they are actually “wildly bullish” because they hope any economic contraction will help to swiftly trim inflation and allow the Federal Reserve to start cutting interest rates by the summer. This in turn will spark a rebound in both bonds and stocks to the range enjoyed before Russia invaded Ukraine.
Unfortunately for this tribe, a U.S. recession in the next few months is almost inconceivable, reckons Kaletsky, and if anything the economy is likely to pick up speed later in 2023.
Here’s the 10 reasons he believes this to be the case. That’s a long list, so presenting some of Kaletsky’s text as as bullet points is necessary.
- In the post-war era, a US recession has never begun with real interest rates deeply negative across the yield curve. If we focus on the level of interest rates instead of the rate of change, this monetary tightening is still the mildest in any cycle since the 1950s.
- Real long rates will remain negative even after the Fed funds rate reaches 5%. The U.S. yield curve is so deeply inverted that real long rates will remain negative even if inflation falls below 5% — unless the curve rapidly disinverts. Neither of these events is likely in the months ahead.
- Yield curve inversion is not a useful recession indicator. Inversions preceded all US recessions since 1970, but there were several false or very premature predictions (in 1966, 1978, 2006 and 2019, unless you believe that Covid came from Wall Street, not Wuhan).
- The U.S. labor market is too strong for a recession.
- Aggregate real income has grown even while average real wages have fallen. That’s because “rapid employment growth has more than offset the decline in real wages”.
- Real wage growth will soon turn positive. With the labor market still extremely tight, wage gains should continue above 5% for the next few months while price inflation should ease to below 5% unless there is another oil shock.
- The stock of personal savings is still far above normal, thanks to government Covid handouts and cutbacks in consumption during lockdown. The order of magnitude is generally agreed to be US$1-2 trillion, equivalent to between 5% and 12% of U.S. household consumption.
- Housing is now stabilizing. Today’s 30-year mortgage rate is lower than at any time in U.S. history before the 2004-07 housing bubble.
- Activity is shifting from goods to services. Big losses in manufacturing are compensated by smaller gains in the much larger service sectors. The net result is that the economy continues to grow
- A US recession in 2023 is “too good to be true.” If a mild U.S. recession happens this year, as most investors now expect, it will prove that Goldilocks, the Magic Money Tree and “immaculate disinflation” are serious economics, not just myths and fairy tales. If so, we will all have to reconsider what we thought we knew about fiscal prudence, sound monetary management and difficult political trade-offs.
So, in summary: no recession. “This means that the real question about monetary policy in the U.S. this year is not when the Fed will start easing. It is whether the Fed will decide in the summer to tighten substantially further, or to accept permanently higher inflation—in either case precipitating a second plunge in bond and equity prices,” says Kaletsky.
Stocks were in line to extend Thursday’s losses with S&P 500 futures ES00, -0.77% down 0.7%. Ten-year Treasury yields TMUBMUSD10Y, 3.893% rose 3.8 basis points to 3.900% as investors continued to fear inflation will remain stubbornly high. The dollar index DXY, +0.70% added 0.6% and gold GC00, -1.04% fell 1.1%.
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China Renaissance shares 1911, -28.20% plunged by more than 50% at one stage on Friday after the company revealed its chief executive and majority shareholder Bao Fan has gone missing.
Traders will be eyeing the index of leading economic indicators for January due at 10 a.m. We’ll also hear from two more Fed officials, Richmond Fed President Tom Barkin and Fed Gov. Michelle Bowman, ahead of the long holiday weekend in observance of Washington’s Birthday on Monday.
Shares of Manchester United MANU, +9.73%, one of England’s most successful football clubs, are in the spotlight ahead of Friday’s deadline for takeover bids. Entities from Saudi Arabi, Qatar alongside Jim Ratcliffe, the British billionaire owner of petrochemicals giant INEOS, are believed to be interested.
DoorDash DASH, -1.89% is up 6% in premarket action after delivering well-received results. Deere shares DE, -1.73% are up 3% after the tractor maker reported fiscal first-quarter profit and revenue that beat expectations by wide margin.
Going in the other direction is Moderna MRNA, -2.80%, down 6% after revealing disappointing results for a flu vaccine.
In a boost to European businesses and households, the region’s benchmark natural gas prices have fallen below 50 euros for the first time in 17 months.
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