The Potemkin Economy

A growing list of weak macro data implies +3.2% GDP growth?

Highlights

• Risk asset valuations are pricing in a 0% chance of recession

• A growing list of weak macro data implies +3.2% GDP growth?

• Relentless government support is holding markets and the economy together

• Wage growth continues to slow

While We Were Sleeping

Quote of the day goes to David Solomon, CEO of Goldman Sachs (from a UBS Group conference yesterday):

“The world is set up for a soft landing. The market certainly perceives there’s a very, very high delta to a soft landing. My own view is it’s a little more uncertain than that.”

No kidding.

A near-21x P/E multiple and a sub-190 basis point spread on BB-rated corporate bonds (the average since 1996 is 350 basis points!) shows that risk assets are priced 0% for a recession at any point in the forecasting horizon. Those BB-spreads are actually a real joke because today’s level is even 100 basis points lower than what has in the past been normal in the context of a “soft landing.”

It was another rough session for bonds yesterday, even with a decent 7-year T-note auction (a whopping $42 billion — is that part of Joe Biden’s Inflation Reduction Act??), but at least fixed- income investors are now completely aligned with the Fed’s latest dot-plots showing three cuts this year. The swaps market has re-priced to a 4.58% year-end funds rate which is precisely 75 basis points below where the spot level is trading.

The next key test will be Jay Powell’s congressional testimony on March 7th and then the employment data the following day. A “hot” PCE deflator for this Thursday is already in the consensus (+0.3% on the headline and +0.4% on the core) and there are only so many times an asset class can sell-off on the same news, previously flashed by the CPI and PPI data.

All that said, the bond market does have a modest (very modest) bid to kick off the day, but it was the same yesterday at this time, and we still finished the session with moderately higher yields. Helping out today was the German Ifo inflation expectation index which fell to 15 in February from 18.8 in January, prompting the Institute to declare that “this suggests that in the coming months, inflation will continue to decline.” Nice! At the same time, the euro-area disinflation momentum is being fueled by a contraction in credit, which isn’t so nice given its recessionary implications — see Eurozone Records First Fall in Bank Lending For Five Months on page 4 of today’s FT (household credit growth at +0.3% over the year to January is the weakest since 2015 and mortgage credit has dipped -0.1% in the first outright contraction in nine years; growth in business lending has ground down to a complete halt as well).

As for the overnight action in global equities, sputter is the word with U.S. futures in the red column and losing momentum over the past few hours (perhaps some concern coming to the fore over the possibility of a government shutdown this weekend, to which I say — come on, who knows about “kicking the can down the road” better than the U.S.?); European markets in aggregate are down modestly (the FT editorial on page 14 ran with The Unfulfilled Potential of Europe’s Stock Markets); and it was a reversal of fortunes in Asia, save for Korea (+1.0%) and Japan’s Nikkei 225 (-0.1%): China’s Shanghai Composite (-1.9%), Hong Kong (-1.5%), India (-0.7%), Thailand (-0.7%), and Singapore (-0.5%). See Signs Of More Stress Appear in China’s Smaller Businesses on page 9 of today’s FT.