In a recession's shadow

Stephen Innes SPI Asset Management

In the case of pick your poison card today, US stocks are trading lower on the back of a macro-heavy day as the toxic brew of higher input costs combined with a slew of worsening economic data keep the US economy in a recession’s shadow.

The decline in the Philly Fed index and the poor momentum in the US housing market seems to be bringing back recession fears among investors. Additionally, the higher-than-expected Producers Price Index, Wednesday's retail sales and the fall in today's initial jobless claims suggest that the fight against high inflation is still ongoing, and more work remains for the Fed that has to be done.

Continued strength in the inflation data suggests the Fed's work is still not finished, and risks of a longer cycle are rising. On the heels of a hotter-than-expected CPI print, Thursday's PPI scorcher confirmed “higher for longer.”

And on the back of this, the 10-Year US Treasury yields are climbing, putting further pressure on longer-duration assets. The constant back and forth between higher inflation and more Fed hike fears have US stocks wavering under recessionary storm clouds.

The Fed's policy actions do not appear to be enough to keep growth below potential. If the drag from Fed tightening on growth fades quicker than expected, along with the tight labour market, it could generate further upward pressure on prices. And would signal more significant upside risks to the market-implied Fed path.

While this environment is typically positive for the broad Dollar with yields elevated and stocks lower, the path forward also depends on how the Fed reacts to this recent data string. But if recession fears start to build in earnest, I suspect the US dollar’s days in the sun could be numbered. In the meantime, it is tricky to fight this uptrend.

Oil prices are trading lower because Fed hike fears keep the US economy in a recession's shadow.

Gold investors are hanging on to those recession signals, but with rate signals blowing in the wind, I suspect the appetite to add to current positions is small.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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