By: Matt Simpson, Market Analyst
Below are just some of the recent data points which have caused concerns that the US could be heading towards a recession.
• US consumer sentiment hit a record low, according to the University of Michigan.
• The Fed are aggressively hiking interest rates to tame increasingly hot inflation (and Fed Funds remain historically low relative to inflation).
• The housing sector continues to buckle under the weight of higher interest rates.
• The Sales Managers Index (SMI) has dipped below 50 to denote contraction, with the report claiming it predicts a recession.
• New orders for the Philly Fed index contracted for the first time in 2-year in May.
As the ISM manufacturing and services PMI’s are at the national level, it makes sense that we may see weakness at the regional level ahead of the ISM’s. It is therefore worth noting that the Philadelphia Fed Index contracted in May for the first time since the pandemic, along with the outlook (+6 month) and new orders. am therefore watching to see if the ISM’s continue to soften in the months ahead, and potentially 'contract' with a print below 50.
Recession bells were ringing again recently as a widely followed yield curve (US 10-year – 2-year) ‘inverted’ by dipping below zero. The inverted yield curve is considered by many to be a predictor of a recession by around 12-18 months ahead.
However, some consider the 10-yr minus 3-month a better alarm bell of recession, and it has yet to invert since Q1 2019. In fact, the Federal Reserve use this spread to gauge the probability of a recession. And that it remains relatively high at +1.54%, it could help explain why the Fed continue to signal to markets they can raise rates without triggering a hard landing. However, take note that the spread topped in early May and is moving sharply lower, which suggests that bond traders see a recession as more likely than it was a few weeks ago.
The S&P 500 and Nasdaq entered technical bear markets by falling over 20% from their recent highs. Although the Dow Jones is yet to breach the threshold as is ‘only’ down around -18% from its highs. Yet as US indices have been trending lower throughout the year, it comes into question as to whether a recession has been priced in.
At this stage it is too soon to tell. Inflation is yet to soften and we’re yet to see the true impact of the Fed’s hikes. A Reuters poll suggests another 75-bps hike is on the horizon in July, followed by a 50-bp hike in September, and that would still mean the Fed fuds rates is significantly below headline inflation. But as the S&P 500 and Down Jones have found support (and moved higher from) their 200-week exponential averages, I suspect the markets have entered a counter-trend move against the bearish trend.
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