Ex---Market troughs tend to need one or both of the following things---a bottoming out of ISM or shift from the Fed/bond market. It is hard to imagine ISM not sliding further, but on the second point, the bond market and more importantly Fed expectations, as you point out, have peaked, at least for now. That is certainly good news and hard to ignore when equity sentiment readings were so off the chart negative. Going forward, regarding the recession call, there is one thing that markets are struggling with. Many, despite the surge of inflation, hold onto the secular stagnation thesis, and there is a flavour of that discounted in the inflation fowards. I have a problem with this view. In the post-GFC world there was household and financial sector deleveraging. That is why trend growth during the 2010s was in the 1.5% range, which being so low, supercharges the risk of recession. But that is not the case now. Just look at the financial obligations ratio---super low. Conclusion: it is harder to get the US in recession, barring some unforeseen shock, because trend growth is probably in the 2.5-3.0 range. Still, on the other side Summers makes a good point about how difficult the Fed's job is with unemployment under 4.0% and inflation over 4.0% and how that often leads to recession. Moreover, I do not find the Fed's forecasts credible--they see marked slowdown in growth but no rise in the unemployment rate. Historically, tightening in financial conditions, always leads to a higher unemployment rate, which would bring in the Sahm rule. What is the bottom line? Markets are deeply oversold on sentiment basis. A 10% rally off the low seems likely, but the question of recession, and a recession style decline aka 35% is not off the table, but possibly just ready to enjoy some nice holiday weather and a Cubs game or two over the summer.
Risk - you rightly point out that the bond mkt may in fact be bottoming out near term. I am still of the opinion that the ultimate 10yr yield lies above here, but also see that yields may be too high relative to the expectations of the mkt. On the ISM, I wonder aloud if the ISM needs to bottom or if the forecast for ISM needs to bottom? There are many top II economists calling for a recession. I think even bulls admit it is slowing. The Russell 2k suggests we are in or going into a recession. Do things just have to get less bad? The question of the Fed comes down imho to which part of the dual mandate really drives the bus - full employment or price stability. I think the Fed blinked last year with the transitory rhetoric. Full employment means it has to be hawkish but it will only take one bad NFP to get them to blink and slow down. I still feel we are in a waterfall decline over the next 12 months, however, still think there is scope for a bigger rally than we got last week. Near term, the construction already under way fills workers pockets, pent-up summer travel demand is real looking at all airline tickets, and fiscal spending will ramp up at the Federal level with other perks at the state levels. Should be a good summer.
Ex---Market troughs tend to need one or both of the following things---a bottoming out of ISM or shift from the Fed/bond market. It is hard to imagine ISM not sliding further, but on the second point, the bond market and more importantly Fed expectations, as you point out, have peaked, at least for now. That is certainly good news and hard to ignore when equity sentiment readings were so off the chart negative. Going forward, regarding the recession call, there is one thing that markets are struggling with. Many, despite the surge of inflation, hold onto the secular stagnation thesis, and there is a flavour of that discounted in the inflation fowards. I have a problem with this view. In the post-GFC world there was household and financial sector deleveraging. That is why trend growth during the 2010s was in the 1.5% range, which being so low, supercharges the risk of recession. But that is not the case now. Just look at the financial obligations ratio---super low. Conclusion: it is harder to get the US in recession, barring some unforeseen shock, because trend growth is probably in the 2.5-3.0 range. Still, on the other side Summers makes a good point about how difficult the Fed's job is with unemployment under 4.0% and inflation over 4.0% and how that often leads to recession. Moreover, I do not find the Fed's forecasts credible--they see marked slowdown in growth but no rise in the unemployment rate. Historically, tightening in financial conditions, always leads to a higher unemployment rate, which would bring in the Sahm rule. What is the bottom line? Markets are deeply oversold on sentiment basis. A 10% rally off the low seems likely, but the question of recession, and a recession style decline aka 35% is not off the table, but possibly just ready to enjoy some nice holiday weather and a Cubs game or two over the summer.
Risk - you rightly point out that the bond mkt may in fact be bottoming out near term. I am still of the opinion that the ultimate 10yr yield lies above here, but also see that yields may be too high relative to the expectations of the mkt. On the ISM, I wonder aloud if the ISM needs to bottom or if the forecast for ISM needs to bottom? There are many top II economists calling for a recession. I think even bulls admit it is slowing. The Russell 2k suggests we are in or going into a recession. Do things just have to get less bad? The question of the Fed comes down imho to which part of the dual mandate really drives the bus - full employment or price stability. I think the Fed blinked last year with the transitory rhetoric. Full employment means it has to be hawkish but it will only take one bad NFP to get them to blink and slow down. I still feel we are in a waterfall decline over the next 12 months, however, still think there is scope for a bigger rally than we got last week. Near term, the construction already under way fills workers pockets, pent-up summer travel demand is real looking at all airline tickets, and fiscal spending will ramp up at the Federal level with other perks at the state levels. Should be a good summer.