Market consensus is for a soft-landing with at least three rate cuts next year. The market does not expect a recession.This may prove correct (I don’t pretend to know) – but there are some chinks in the armor. Readers will know I don’t subscribe to a soft-landing. Typically in the lead up to a recession – spectators will generally lean towards it being “soft”. Few ever forecast ‘hard landings’. For example, if you have unemployment below 4% and positive GDP growth – it’s hard to see anything else. But very rarely do things land softly. We’ve seen one over the past five decades. That’s not a high ratio. What’s more, soft landings are exceptionally rare after 550 basis points of rate hikes (not to mention over $1 Trillion in quantitative tightening – of which we have no parallel).
"Interest Rates / Bonds"
People Choose What They Want to Hear
Markets continue their ascent after a blistering November. The Dow and S&P 500 each gained ~9% for the month – in what is typically a seasonally strong time of year. From a year-to-date perspective, the Dow is up 8.5%, the S&P 500 is up ~19% and the Nasdaq up over 35%. The anomaly? 493 of the 500 stocks on the S&P 500 are barely positive for the year (i.e., the equal weighted index). So what’s driving the optimism? Simple: the expectation of lower yields and the Fed hitting its terminal rate. This post looks at potential blind spots for the market.
Two Reasons the Fed Could Cut Rates
The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.
Inflation Trending Lower… But More to Do
Today we received CPI for October. It was slightly softer than expected and continues to (slowly) trend lower. That’s good news. However, stocks jumped on the data and feel its enough for the Fed to end further hikes. What’s more – the market is now pricing in rate cuts as early as March. That feels like a dangerous (aggressive) assumption… I think there’s a lot more work to do. Remember – getting inflation down from 4% to 2% is where the hard work begins. Wage growth for example remains at 4.2% YoY.
For a full list of posts from 2017…