There you are with all those fancy indicators like yield curves, ISM Manufacturing, and housing markets. They all point in the same direction, down! But the incoming US macro numbers are in no way pointing to a recession, nor to a soft landing. Spend it!
The latest in the series of positive surprises are US retail sales. These rose by 3.0 percent in January. Not on an annual basis, but on a monthly basis. It was the strongest increase in almost two years, erasing in one fell swoop the two negative months before - which, incidentally, were also revised upwards. And even if seasonal effects play a role here - December too weak, January probably too strong. In general, Americans for now continue to spend steadfastly
Inflation stickiness
The latest spending figures come on top of the January inflation figures, which I think are too easily applauded. Powell’s favourite Core Services ex Shelter CPI rose 3.8 percent year-on-year over the past three months. That’s better than total and core inflation of 6.4 percent and 5.6 percent respectively, but also not right now on top of the Fed’s 2.0 percent target. Moreover, I think it is good to keep a close eye on broader measures of inflation as well. For instance, inflation in the broad services sector over the last three months was 6.5 percent year-on-year. And the median price increase of all goods and services was 7.0 percent.
Glowing job market
In my column last week, I dwelt at length on the massive job growth in January of over 500 thousand jobs. And at the lack of good explanations for it. Certainly seasonal effects played a role, but mainly because, with such a huge tightness in the labour market, few employers see fit to let staff go. Add to that hefty wage growth, and that spending grew nicely.
6.0 percent Target Rate?
One swallow does not make a summer, of course, but how many do we need to come to the conclusion that there is no sign of a growth trade - let alone a recession? In any case, I am lowering the odds of a recession.
Fortunately, the Fed was already not assuming a recession, but this latest set of figures will still make many a FOMC member think. So I’ll pull out the latest Dot Plot. There, interest rates peaked at 5.125 percent - which is the average of the upper and lower bound. But that median 5.125 percent does not show that there were many more FOMC members who think interest rates should go up even further. How many of those members would think by the latest flurry of figures: let’s mark interest rates down a bit this time.
Immaculate disinflation?
If you had asked me a year ago whether a Fed rate of 6.0 percent was possible, I probably would have laughed. Also because the interest rate sensitivity of the US economy - and that of every other country - has increased dramatically. 6.0 percent now works through much harder than 6.0 percent in 1980. But as far as I am concerned, the door to that 6.0 percent is now really open. There are two ways not to get there. Either the “immaculate disinflation” story is true and inflation drops neatly back to the 2.0 percent target this year. Or the traditional recession indicators live up to their reputation.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His chart of the week appears every Monday on Investment Officer.