The stock markets have had a fantastic rally. And while I am all for rising prices, it has also been a bit boring at times. But with the latest set of macro figures, things are getting a bit more exciting again, with a likely good outcome as a result.
I have regularly been called a “permabear” over the past 12 months, if not longer. Because even though the US economy in particular was steaming ahead, the chances of a recession have never been zero, in my opinion.
Two key examples that underline this are the yield curve and the labour market. On average, it took 18 and 19 months, respectively, after the US yield curves (10-year - 3-month, and 10-year - 2-year) turned negative for the first time, before “the” recession occurred. We are at rounded 20 and 26 months at the time of writing. If you include the margin of uncertainty that accompanies that average - after all, the number of recessions for which data is available can be counted on two hands - you simply cannot say that the probability of a recession is zero.
The same goes for the US labour market, which is still quite tight. However, historically, it took an average of about 24 months after the first increase in a major Federal Reserve tightening cycle before unemployment started moving. We are now at 26 months, and the unemployment rate has risen a few tenths. So the same applies here: you cannot now say with certainty that the probability of a recession is zero.
A series
Over the past few weeks, we have seen a veritable series of disappointing macro data. It pretty much started with retail sales for April. These were disappointing, but were completely overshadowed by a marginally better inflation figure. Confirming once again that markets are completely driven by their appetite for liquidity.
Retail sales were followed by, among others, the Chicago PMI, which completely fell through its hooves in May and is at solid red, a disappointing ISM Manufacturing figure and another dip in the number of job openings.
What’s it gonna be?
With the series of negative macro figures, the question arises whether a recession may be in the making after all. And more importantly, whether the increasing likelihood of that will give the Fed the green light to cut interest rates. Because if anything has become clear, it is that central banks are very keen to cut interest rates. ECB economist Philip Lane is terrified that inflation will fall below 2 per cent again and therefore cuts are needed.
In other words, the ECB is at least partly responsible for an extreme rise in the general price level, but don’t think ECB policymakers show the slightest shred of compassion should prices fall. Gee, why would that be anyway?
Anyway, I expect central banks will need very little to ease policy again. The question is more how aggressively they do so. Are they taking into account the double-digit inflation rates that many have faced, or is it just more of the same again? If policymakers change tack right away, I would just load up on risky and scarce investments.
Jeroen Blokland analyses topical charts on financial markets and macroeconomics in his newsletter The Market Routine. He also manages his own multi-asset fund. Previously, Blokland was head of multi-asset at Robeco.