Recession? The condition of the economy counts

Outlook:

Today we get the Chicago Fed activity index for February and the Richmond Fed manufacturing index for March, not market-movers but food for recession thought. About a dozen Fed speakers are scheduled this week. We already have Evans, who said if downside risks develop, the Fed will not hesitate to cut. We get Harker and Rosengren later today. As noted above, former Fed chief Yellen said overnight that the inverted yield curve means a cut might be needed but doesn't signal a recession. Everywhere you look, pundits propose the Fed needs to take back the Dec 2018 rate hike.

Bloomberg likes to point out that the last nine times the yield curve inverted, a recession followed. At the same time, this particular spread (3 month/10 year) fell below zero for the first time in January 2006—22 months before the beginning of the recession. An editorial contains this info: "There's a lot of misplaced excitement over Friday's U.S. yield-curve inversion. So many are referencing it as strong evidence of an imminent recession -- the reality is it hasn't proved a particularly timely predictor. Sure, the inversion in February 2006 signaled a coming U.S. recession... 22 months in advance! Maybe that's considered timely for academics -- but not for traders.

"Similarly, the April 2000 inversion preceded the subsequent recession by 11 months. The September 1998 inversion proved a false alarm, and an inversion first occurred 14 months before the 1990 recession. So, over the past 35 years, even when it was a true positive, the average lead time was more than 15 months. To improve the signal, wait for the curve to invert by 25bps and subsequently re-steepen to +50bps. That predicted the three recessions with an average lead time of 4 months and provided no false positives. That timing is far more in synch with the related stock market peaks that have come and significantly more useful for traders. In summary: fear the significant re-steepening after a proper inversion; don't fear a temporary small inversion."

The condition of the economy counts. For a negative yield curve to have muscle, the economy needs to be contracting. But on Friday the Atlanta Fed revised up its forecast from 0.4% to 1.2%, based on inventory investment, wholesale trade, and the one we like, real residential investment growth from a negative 4.8% to +0.6%.

It remains to be seen whether the equity gang decides to go into fear mode. Stock market guru Lynn notes that the month and quarter end this Friday, "which should make for volume and volatility. And should markets unravel the quarter's gains by Friday, that would be the 2nd quarter in a row that markets finished to the downside. Given how few retail investors have come to trust the markets, a 2nd down quarter would be a death knell for markets—no matter how many new ways ETF's slice and dice investing."

About Brexit, a site named has this: "A so-called no deal Brexit remains an option on the table despite it having been rejected by MPs in parliamentary a ballot earlier in March and the market's focus has now turned toward April 12 which, absent House of Commons backing of the EU Withdrawal Agreement, will see government choose between a further extension of the Article 50 negotiating window and leaving the EU without a withdrawal agreement.

"However, before then and likely during the current week, MPs from all sides of the House of Commons will have an opportunity to make their views clear to the government in a series of non-binding indicative votes. They may also get an opportunity to vote on PM May's Withdrawal Agreement once again.

"'The softer Brexit option put forward by the Labour party of adopting a permanent customs union could have the best chance of securing a majority in parliament. If a softer Brexit plan is able to secure a majority in parliament it would be welcomed by the pound, whereas the pound would take a hit if no majority can be secured for any alternative option,' says Lee Hardman, a currency analyst at MUFG."

Hardman knows a hawk from handsaw so we will adopt his position. Sterling is not dead... but life support is in the hands of Parliament. Be scared.

If we assume the US economy is not falling into recession (no rate cut imminent) and also that the UK somehow manages to get its house in order—a tough proposition, to be sure—it still remains that weak G7 economies and a dovish tilt mean emerging markets should become the darlings of the yield-seekers again. This is obvious, right? So why is the dollar not thriving against the peso and real? We also have a giant drop in the Turkish lira (5% on Friday alone) which of course has its own conditions.

But we probably shouldn't assume the Fed will be quiet and patient... after all, we just got the Powell put. Why would we not expect more kow-towing to the market? Bloomberg reports "Money markets are now pricing a 90 percent chance that the Federal Reserve will cut rates by December." We don't know where Bloomberg got that number. The CME FedWatch tables show a 4% chance of a cut by the May meeting. It's 19.2% for June, 25.6% for July, 34.1% by Sept, 36.5% for Oct and 39.8% for Dec. None of these numbers is 50% or more. Granted, the Fed funds rate futures are not a particularly good forecasting tool, but it's important to report stuff accurately, especially scary stuff. Bloomberg is schizophrenic, warning in one place that the yield curve inversion may not mean much but shouting from the rooftops in another place that money markets see a 90% chance of a cut. Both things may be true but together they are not useful.

Tidbit 1: The Mueller report was delivered to the attorney general late Friday afternoon. Either the press really did have a tip from inside or the clock was right twice a day. Trump had been complaining that unelected people are investigating him--wrong on two counts. Justice officials are not elected but rather appointed (and for good reasons). And the Mueller investigation was not of Trump, but rather to determine whether the Russians tried to influence the 2016 campaign (and to what extent) and whether any of the Trump campaign camp was involved in that effort and if they then obstructed justice to avoid getting found out. In the end, the Mueller report exonerates Trump and the campaign from collaboration/conspiracy with the Russians, but not of obstruction of justice.

Mueller has dozens of indictments and jail sentences, and has farmed out an unknown number of further investigations to other jurisdictions, including the raptor Southern District of New York. Many are disappointed Don Jr. and Kushner were never called, but for all we know, one of those other districts is on those cases. Trump Senior has a problem in future complaints about the report since he declined to be interviewed in person and under oath. We are all dying to know whether Mueller asserts he didn't indict Trump solely because it goes against the Justice Dept rule and instead recommends Congress impeach. In any event, we will all be getting a copy of the report sometime soon and can judge for ourselves.

New York magazine did an unscientific poll and found that 51% think Trump will run again in 2020 but get beaten by the Dem, any Dem. Comedian Bill Maher is not so sure, since the Dems (15 candidates so far with more to come) are befuddled and performing badly. Beto is apologizing for everything while Kamala is oozing naked ambition out of every pore and the unbearably self-righteous and annoying Warren is the only one with policies.

Tidbit 2: After running off the rails all last week, starting with over 50 tweets the weekend before last, Trump continues to appear unhinged. He criticized a dead guy a dozen time (McCain). On Friday he announced he will nominate campaign advisor Stephen Moore to the Fed. Moore is a veteran of the Club for Growth and Heritage Foundation, and embraces supply side voodoo, er, economics. Last December he said the Fed Board should be "thrown out for economic malpractice." The Senate confirmation hearing will be fun.

Scarier is Trump reversing sanctions on N. Korea imposed only the day before by the Treasury Dept, saying Kim is a great guy and sanctions won't be necessary. Funny, Trump thinks Putin is a great guy, too, but he has not tried to remove sanctions on Russia (yet).

 

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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