Nick Timiraos of the Wall Street Journal published an article entitled Why A Soft Landing Could Prove Elusive. His lead sentence and the graph below speak volumes about the accuracy of headlines about soft landings. He starts: “On the eve of recessions in 1990, 2001, and 2007, many Wall Street economists proclaimed the U.S. was on the cusp of achieving a soft landing, in which interest-rate increases corralled inflation without causing a recession.” The graph below shows that headlines referencing a soft landing are most common before recessions. Of the four increases in soft landing headlines, 1995 was the only one that proved accurate. There have been 144 headlines about a soft landing between last year and this year. That exceeds the prior instances going back to 1985.
Nick offers caution that the surge in soft landing headlines may be a precursor for a hard landing. In his opinion, “Here is what could go wrong this time”:
- The Fed has already raised rates too aggressively and will pause longer than needed.
- The economy stays hot, forcing the Fed to raise rates more.
- Energy prices continue higher, both hurting economic growth and pushing inflation higher. Thus, the Fed would be less likely to ease if need be.
- Financial Crisis. The U.S. financial system is more leveraged now than at any other time. Higher rates will eventually force a deleveraging and likely financial crisis.
What To Watch Today
Market Trading Update
Unsurprisingly, the market traded sloppily yesterday, with stocks rallying in the morning but selling off into the afternoon to end up virtually flat for the day. Small and Mid-Cap stocks were the worst performers, with Apple (AAPL) and Google (GOOG) holding up the large-cap indices. With the Federal Reserve’s FOMC policy meeting this week, traders will be unwilling to take on large bets ahead of that announcement. While it is widely anticipated the Fed will do nothing and mostly reiterate prior statements of being data-dependent and higher-for-longer, there is still a risk of an unanticipated statement or action. Expect further weak trading action today ahead of the policy announcement tomorrow.
Buyers Strike For Treasury Bonds?
Some claim there is a buyer’s strike for Treasury bonds. One way to check the veracity of such claims is to observe the bid-to-cover ratio for Treasury auctions. As shown below, the bid-to-cover ratio for 10-year notes and its moving average has been stable and in line with the ratio of the last ten years. The ratio measures the number of bids at the Treasury auctions versus the amount of bonds being auctioned. Further evidence is found in our Tweet of the Day. As it shows, the inflows into Treasury bond ETFs dwarf anything experienced in the last fifteen years. We caution, however, how much of the inflows are going to very short-term bond ETFs, which act as money market surrogates.
Consumer Inflation Expectations Fall As Oil Rises
Despite $4+ gasoline at the pumps and the price of crude oil rising above $90 a barrel, consumer expectations for inflation are falling. We are a little surprised as there tends to be a decent correlation between gasoline prices and consumer inflation expectations. The most recent University of Michigan five-year inflation forecast fell from 3.0% to 2.7%. The Fed considers inflation expectations an important guide to future inflation rates. As such, the latest Michigan reading may help ease some nerves at the Fed that inflation has started to rise again.
The following graphs provide context for the relationship between the Michigan 5-year inflation survey and actual 5-year inflation rates. The scatter plot shows a decent correlation (R-squared =.55) between expectations and actual inflation readings. However, the period we offer saw little volatility in inflation rates. The second graph shows that the survey tends to overestimate inflation by .50% to 1.00%.
UAW Strike Update
The United Autoworkers Union (UAW) rejected the latest proposal from Stellantis (STLA- aka Chrysler), which means the strike against the Big 3 continues. Stellantis offered a 21% pay increase, in line with Ford’s (F) +21% and General Motors (GM) +20%. The UAW has come down from 40% to 36%, but a wide gap still exists. Fortunately, the UAW is only calling for small strikes at certain plants. If the number of strikes escalates, more employees join the picket line, and the situation persists, we will see a more noticeable economic impact. It will be interesting to see if Jerome Powell opines on the situation on Wednesday.
Tweet of the Day
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