Equities continued to rally, especially as investors took Fed Chairman Powell’s comments as dovish. Despite the best efforts of Treasury Secretary Yellen, et. al., to change the long-standing definition of a recession, the U.S. economy has likely slipped into recession.
While two consecutive quarters of negative GDP growth has been the definition of a recession since economist Julius Shiskin was credited with the classification in 1974, the data suggests the recession is ever so slight (so far). Second quarter GDP posted –0.9% decline, compared to –1.6% decline in the 1st quarter. However, GDP in actual dollars slightly improved, unlike during the pandemic.
Regardless, other areas of the economy have slowed measurably - housing, manufacturing, and the labor market.
Initial Jobless Claims rose last week for the 8th consecutive week and hit fresh 6-month highs. We will be watching the JOLTs Job Openings release this week as anecdotal evidence suggests companies are removing job listings. In addition, the market is expecting a lower Jobs number on Friday, with 250,000 new jobs for July versus 372,000 in June. A lower-than-expected Jobs Report would give the Fed a longer runway to raise rates, which would, in turn, harm the case for a Fed "pivot" in the near future.
The Fed Manufacturing indices, while volatile from month-to-month, have been in a downward trend since September of last year. The Housing Market Index is at 3-year lows as homes for sale are staying on the market longer, compared to one year ago. Sales of New and Existing Homes are at multi-year lows. Our own Recession Indicator has now moved into the yellow zone, indicating that recession is imminent. Multiple criteria of the Indicator are at levels commonly associated with recessions.
In light of all of this information, equity markets continued to rally even as the Fed announced an expected 75 basis points rate hike last week.
Equity investors seemed to cheer Fed Chairman Powell’s comment of the Committee moving to a “"data-dependent, meeting-by-meeting basis" for future rate decisions as dovish and a signal of a future rate cut. There are a few problems with that sentiment. First, the market is pricing in another 50 basis point rate hike in September, 25 basis point hike in November, and 25 basis points in December. Equity investors seem convinced that inflation is peaking. Yet, Friday's report on Consumer Spending showed a surprise increase in spending during the month of June (+1.1% versus 0.9% expected and +0.3% in May). If consumers continue to spend, that will increase the rate of inflation - thereby, keeping the aforementioned rate hike schedule in place. We would urge caution to investors all to eager to buy into equities at this point.
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