Experts are warning that the probability of a US recession is still well under 50%

Outlook: It’s a juicy calendar this week. Probably the important number will be retail sales, expected up 1% in April after a revised 0.7% in March, led in part by car sales. April industrial production could be unhappy and housing will likely be in the dumps, too. After all these things come out tomorrow, we get a fresh Atlanta Fed GDPNow for Q2. It was 1.8% last week.

The general investing public and other amateurs are enjoying the doom-and-gloom in phrases like “bear market rally” while at the same time, the experts are warning that the probability of a US recession is still well under 50%. Goldman has 30% and Goldman has terrific economists.

We see something similar on the inflation front. The 10-year breakeven peaked on April 22 at 2.98% and has dipped to 2.59% last Thursday. It’s not clear whether this means confidence in the Fed’s ability to bring down inflation or faith that the peak has been reached (or both).

We find most analysts blinkered to a one-inch focus, whether it’s tech stocks or housing or supply chains. They extrapolate what they see in their own little corner to the whole world. Where this is not silly is two places–how fast China can recover from its lockdowns (and the property bust), and the trajectory of the Ukraine-Russia war.

One problem is that China did not accelerate to warp-speed the vaccination process, which is curious since of all the places in the world, China has the moxie and the willingness to use authority to get that done. Why not? Nobody knows.

As for the Ukraine war, Pres Zelinsky gets the Academy Award for winning the hearts and minds of the free world. Considering all the petty crap we have seen in crisis situations over the past few decades, it’s astonishing that most of Europe and indeed, most of the world has come together to help Ukraine fend off Putin. It’s massive amounts of money, armaments, and humanitarian aid, too, not just moral support. Neutral Sweden joining Nato, plus oft-invaded Finland–wow. Even Switzerland is willing to talk and “reinterpret neutrality.”

This is a Big Deal. It may–may–mean the gruellingly long ordeal everyone predicted might not last so long, after all. And as soon as it’s over, the re-building of Ukraine in a modern Marshall Plan will generate vast amounts of food and other goods.

Oxford Economics has a view on the dollar-it’s peaky, and can stay there for some time to come, at least to “early H2,” which we take to mean July/August. Even so, it will remain elevated.

“We expect the dollar to reverse course when a) the global credit impulse, and liquidity conditions in general, become more favourable, and b) the market is comfortable with pricing in a rate hiking cycle that is seen to peak within our tactical horizon (6-9 months) rather than later.

“Until these conditions are met, it will be difficult for the greenback to weaken materially, given the tailwinds from risk aversion and momentum. We are neutral in our USD positioning vs the majors (EUR, JPY and GBP), and are short dollars against AUD and CAD… These latter two currencies have been early movers in the hiking cycle and continue to benefit from the commodity price rally of the last 18 months, supercharged by the war in Ukraine and ongoing supply constraints in Asia.”

The core argument is intriguing: “The state of the global economy can be (simplistically) assessed by looking at the health of the US consumer, and Chinese output capacity, with the US Dollar benefitting when either of these is not at potential. Although we are still sanguine about the prospects of consumer led growth in the US, and believe the cycle can extend further, questions remain regarding China’s ability to deliver the requisite reflationary boost to not only arrest domestic deleveraging forces arising from the property sector, but also to enable excess liquidity spill-overs to the rest of the global economy via an enhanced credit impulse. A tepid China credit impulse will constrain the ability of the Dollar to weaken.”

In other words, the fate of the dollar depends on China’s managerial abilities. Fortunately, they are not fools. Unfortunately, forecasting in an intricately intertwined complex system is not really possible. There are just too many unknown unknowns. We would be inclined to add more factors as possibly co-determinative, but they don’t help at all.

One thing we wish we could know is what happens to Russia after it loses the war in Ukraine–not just politically, but with respect to its supply to the rest of the world of those specialized minerals and oil and gas.

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