As Americans slowly get back to work following the 4th of July weekend, the onset of summer is finally here. The markets are ready for a summer reset too.
The recession call is proving so difficult. GDP negative 2Q in a row has always been at some later date been called a recession by NBER. Atlanta Fed is negative for Q2, but stdev this far out is like 1.5%, so a positive is not impossible. Meanwhile alternative measures like GDI were on the order to 2.4% in Q1. Meanwhile, credit is showing some, but not massive strain. Cuts are getting priced into the strip--nearly 100bps, which is saying recession is dead certain. There is not a obvious forced multiplier of a leverage accident in the banking sector, although shadow finance companies such as Rocket Mtg are seeing a bit of stress. I feel the way the VIX is trading as if market owns a lot of downside insurance. Sentiment is dire. Things can change but, is not the balance tilting towards a 15% rally in stocks, even if the recessions scenario and much deeper sell-off into 35% recession region is the ultimate destination...Meanwhile, liquidity is dire and remember it can work both ways...Oh btw, I love Piper Sandler since they got the Cornerstone guys, first rate, and nobody blames them for using historical parallels and thinking markets don't bottome without either a Fed pause (price in?) or ISM troughing (40ish)---of course in the midcycle slowdown thesis where ISM holds in above 50 and rebounds as confidence increases around peak in inflation, helped by lower commodities, might throw a spanner in the works...Finally on commodities---way too many times to count, arguments are made about commodites on supply that prove errant. For me its always about demand, which even if optimstic on avoiding a nasty recession, it will be key driver here....While I am not particularly bearish spoooz, I can definitely buy into $60 oil...
Shadow banking world of fintech and peer to peer networks in the crypto world are definitely the epicenter of stress in this particular episode. The recession call is indeed quite difficult. Anecdotally, I see very few if any signs of it whether that is in the Midwest where I live or in Europe on vacation. People I speak to also do not see signs of it. Restaurants are crowded. New home construction is still quite strong. Maybe it falls off a cliff next spring, but it isn't now and the people doing the building are getting paid. Tons of highway construction to and those folks are getting paid. I know the STIR mkt is convinced of Fed policy error and a recession. The ISM data foreshadows it. Even the yield curve hints at it. However, the signs aren't present so maybe it is quite mild and not like the 2000 or 2008 recessions. Maybe it is an issue where we have a real recession but never get close in nominal terms. Much like 1981-1982. Stock returns were strong through this. If there is a recession, it is a train wreck that everyone sees coming which is why I think skew is flat and the VIX subdued. While I would not be surprised to see a short sharp sell-off in commodities as there are many tourists there now, I think the ESG forces are still leading to a world of structural undersupply. OPEC doesn't have the spare capacity everyone thinks. Venezuela will take a decade. Russia may choose to skip the West if a cap is implemented. China will continue to get cheap oil (either from Iran or Russia) but may still struggle to get out of its own way. I think China into the plenum is the interesting place to watch.
Richard, Data trek recently pointed out that copper might not be the best indicator towards a weakening global economy and it works on its own fundamental reasons more so and even its track record towards predicting a global recession is not stellar. Still a strong base case can be made for recession next year.
Thanks for the comments. Copper, like all commodities, has its own idiosyncratic drivers. However, those drivers are largely for home construction and the electrified economy (more recently). These two sectors have a lot to do, some might argue all to do, with the cyclicality of the economy. If you are trying to find a quantitative signal, and not a qualitative confirmation, you often have to manipulate the data quite considerably to get a strong R^2. However, if you are using it as confirming evidence, it can be quite useful.
The recession call is proving so difficult. GDP negative 2Q in a row has always been at some later date been called a recession by NBER. Atlanta Fed is negative for Q2, but stdev this far out is like 1.5%, so a positive is not impossible. Meanwhile alternative measures like GDI were on the order to 2.4% in Q1. Meanwhile, credit is showing some, but not massive strain. Cuts are getting priced into the strip--nearly 100bps, which is saying recession is dead certain. There is not a obvious forced multiplier of a leverage accident in the banking sector, although shadow finance companies such as Rocket Mtg are seeing a bit of stress. I feel the way the VIX is trading as if market owns a lot of downside insurance. Sentiment is dire. Things can change but, is not the balance tilting towards a 15% rally in stocks, even if the recessions scenario and much deeper sell-off into 35% recession region is the ultimate destination...Meanwhile, liquidity is dire and remember it can work both ways...Oh btw, I love Piper Sandler since they got the Cornerstone guys, first rate, and nobody blames them for using historical parallels and thinking markets don't bottome without either a Fed pause (price in?) or ISM troughing (40ish)---of course in the midcycle slowdown thesis where ISM holds in above 50 and rebounds as confidence increases around peak in inflation, helped by lower commodities, might throw a spanner in the works...Finally on commodities---way too many times to count, arguments are made about commodites on supply that prove errant. For me its always about demand, which even if optimstic on avoiding a nasty recession, it will be key driver here....While I am not particularly bearish spoooz, I can definitely buy into $60 oil...
Shadow banking world of fintech and peer to peer networks in the crypto world are definitely the epicenter of stress in this particular episode. The recession call is indeed quite difficult. Anecdotally, I see very few if any signs of it whether that is in the Midwest where I live or in Europe on vacation. People I speak to also do not see signs of it. Restaurants are crowded. New home construction is still quite strong. Maybe it falls off a cliff next spring, but it isn't now and the people doing the building are getting paid. Tons of highway construction to and those folks are getting paid. I know the STIR mkt is convinced of Fed policy error and a recession. The ISM data foreshadows it. Even the yield curve hints at it. However, the signs aren't present so maybe it is quite mild and not like the 2000 or 2008 recessions. Maybe it is an issue where we have a real recession but never get close in nominal terms. Much like 1981-1982. Stock returns were strong through this. If there is a recession, it is a train wreck that everyone sees coming which is why I think skew is flat and the VIX subdued. While I would not be surprised to see a short sharp sell-off in commodities as there are many tourists there now, I think the ESG forces are still leading to a world of structural undersupply. OPEC doesn't have the spare capacity everyone thinks. Venezuela will take a decade. Russia may choose to skip the West if a cap is implemented. China will continue to get cheap oil (either from Iran or Russia) but may still struggle to get out of its own way. I think China into the plenum is the interesting place to watch.
Richard, Data trek recently pointed out that copper might not be the best indicator towards a weakening global economy and it works on its own fundamental reasons more so and even its track record towards predicting a global recession is not stellar. Still a strong base case can be made for recession next year.
Thanks for the comments. Copper, like all commodities, has its own idiosyncratic drivers. However, those drivers are largely for home construction and the electrified economy (more recently). These two sectors have a lot to do, some might argue all to do, with the cyclicality of the economy. If you are trying to find a quantitative signal, and not a qualitative confirmation, you often have to manipulate the data quite considerably to get a strong R^2. However, if you are using it as confirming evidence, it can be quite useful.