Economics Journal: Don’t Lose Sight of Recession
Economics Journal: Don’t Lose Sight of Recession
Discussion
With the FRB Atlanta GDP nowcast projecting almost 6% real growth in 3Q23, the UST curve bear steepening, and the Fed floating the possibility of hiking Fed Funds to 6% in 2024 is the economy continues to reaccelerate in 2H23, it’s easy to lose sight of recession risk. Don’t.
The “no landing” scenario does not imply an elongated cycle that gently drifts lower into an eventual mild “soft-ish” landing. No landing means the Fed stays far tighter for far longer than would have otherwise been necessary had financial market and economic participants not fought the Fed for the last 18 months…leading to *something* suddenly breaking. Recall how SVB failed within hours of Powell driving UST 2s to above 500 bps back on March 8 - the next week the market started pricing in FED rate cuts starting in June!!
A very similar set-up to SVB week is in place right here and now with Powell on deck at Jackson Hole tomorrow morning. I provided a detailed preview of his speech here…
…While below Andy Constan takes it a step further, projecting a sharp rise in UST 2s as Powell seeks to wring rate cut pricing out of the belly of the curve.
*Something* could very well “snap” here in the next couple of months.
Watch the Economy
As regular readers of The WOTE know full well, I put a lot of weight on The Kitty’s view of the economy (and fund flows) as he has consistently nailed the various zigs and zags of the economy over the course of this tightening cycle. His now-longstanding view is that the economy is likely to enter recession sometime in 2H23 with the risk being it doesn’t hit until early 2024.
Interestingly, in the last week I’ve received three pieces of independent anecdotal information supporting The Kitty’s timeline:
A local coffee shop is saying it’s seeing abnormal levels of slowing in its business given the time of year right in the middle of heavy tourist traffic
A local manufacturing business is “hunkering down” for an oncoming recession
A local water pump distributor is seeing “definite slowing” in overall sales, both price and volume. I talk this guy 4-5 times a year, and last year volumes were down -5% while price was up 15%; now price is barely covering volume declines.
And last but not least - the inspiration for this short post - Bob Elliot xweeted out tonight that he now thinks a recession of greater than expected magnitude hits sooner than expected.
Could it be that it’s the economy that finally “snaps” here in the next two months?