By Mike Dolan
LONDON (Reuters) – Like mirages on the horizon, recession forecasts seem to be appearing and disappearing with great regularity – questioning any investment conviction, the reliability of pandemic-distorted data and still-low volatility gauges in financial markets.
In just six weeks of 2023, economic forecasters have hurriedly revised away this year’s long-assumed recessions in euro zone and the United States – confounded as they were by a mix of warm weather in Europe and some wild U.S. jobs market revisions and statistical quirks that have dramatically reshaped the interest rate outlook stateside.
Throw in China’s unexpectedly swift removal of “zero COVID” restrictions and already 2023’s global picture looks radically different than it did only in December – never mind the previous January before the Ukraine invasion redrew inflation, interest rate and investment maps for everyone last year.
Bearing in mind the United States, China and euro zone together account for well over half the annual $101 trillion of global output, that’s some collective moving target.
Wall Street giant Goldman Sachs – often a market mover with its big macro calls – is a good example. Last month it revised away forecasts for a euro zone contraction this year and this week cut its chances of a U.S. recession in 2023 to just one-in-four from one-in-three previously.
Yet as recently as mid-December, forecasts from Bank of America, Barclays and BNP Paribas were also plumping for a full-year contraction of U.S. gross domestic product this year.
Last month’s Bank of America survey of fund managers around the world still had net 68% expecting recession this year.
But no one’s quite sure all of a sudden – and so much for so-called ‘leading indicators’ like the historically inverted U.S. Treasury yield curve – traditionally a sure fire predictor of downturns ahead.
Last Friday’s red hot January employment report is forcing hurried rethinks everywhere. Treasury Secretary Janet Yellen stated baldly that the lowest jobless rate since 1969 is simply inconsistent with recession this year and Federal Reserve policymakers are already turning even more hawkish on the rate outlook.
Rates markets reared up to price Fed rates back above 5% and now expect them higher at yearend than they are today. Stocks swooned again and currency strategists, such as the team at Morgan Stanley, switched negative views on the U.S. dollar worldwide to neutral all of a sudden.
If that wasn’t enough whiplash, Fed Chair Jerome Powell chimed with his colleagues on more that needs to be done to tackle inflation – but also laced his comments with expectations of a cooling jobs market and opined on the difficulties predicting this cycle.
In other words, if your outlook hinges on getting a recession call right or nailing the timing of peak interest rates, be prepared to shift it now from week to week.
Graphic: Inverted Yield Curve https://www.reuters.com/graphics/GLOBAL-MARKETS/dwpkdejxqvm/chart.png
Graphic: US terminal rate https://fingfx.thomsonreuters.com/gfx/mkt/akveqmndavr/One.PNG
Graphic: Reuters poll on global growth outlook https://fingfx.thomsonreuters.com/gfx/polling/zdvxdrzrjvx/Reuters%20poll%20graphic%20on%20the%20global%20growth%20outlook.PNG
HOARDING AND FOMO
What’s the big deal? As famed British economist John Maynard Keynes is often quoted as saying: “When my information changes, I alter my conclusions.”
But the problem may indeed be the “information.”
To be sure, the dance around the “R word” is a little artificial. Rigid technical definitions involving consecutive quarters of contraction may mean changes are only the difference of a couple of tenths of GDP either way, the sort of margin easily revised away down the pike anyway.
A bigger issue is whether monthly data can be trusted for steer on the business cycle you’re trying to second guess.
High-frequency economic numbers were bamboozled by the pandemic’s economic shutdowns and reboot worldwide – with distortions still lingering on everything from supply chains to labour force participation, savings, consumption and policy rescues.
The energy shock around Ukraine merely compounded that by amplifying an outsize inflationary twist and household squeeze while jamming some supply chains even more.
Monthly economic updates now require significant health warnings and assumptions of “normalisation” may have been premature.
Although not inconsistent with other tight labour market soundings, the U.S. January jobs report was riddled with revisions, remodelling and seasonal adjustments.
While that may not change your view of employment today, reasonable concern about labour hoarding and lags between announcements of company layoffs and data surveys mean it’s hard to rely on it solely for a change of course the way many in markets seem to have done since Friday.
But even doubts about the data can be read both ways. Barclays’ economists stressed there was evidence of job hoarding in the fact that a huge downturn in the U.S. housing market last year clearly hasn’t shown up in construction layoffs. And if the Fed had assumed those job cuts would come and the sector is already bottoming, there may be more aggressive policy ahead.
But the numbers are so unclear, we’re still in a guessing game.
“It would be helpful to hear an assessment of what the Fed actually thinks is happening given structural economic changes, cyclical impulses and poorer quality data,” lamented UBS economist Paul Donovan ahead of Powell’s speech on Tuesday.
Investors trying to bet on where all this pans out can’t be filled with confidence.
And yet market volatility gauges have stayed peculiarly serene.
At just under 20, Wall Street’s VIX is pretty much at its average for the 33 years of existence. Bond market volatility remains well above its 20-year mean – but it has retreated sharply to two-thirds of last year’s peaks. Even currency volality is only marginally above average.
Are people just peering through the noisy macro and fearful of missing out on the return to beaten down assets?
BNP Paribas Chief Economist William De Vijlder talks of the risks of being “three times wrongfooted”.
“One would expect that bond and equity markets would rally when central banks signal that the tightening cycle is (almost) over,” he said. “But such positioning comes with the risk of being wrongfooted by the data. What follows is huge volatility.”
Graphic: The jobs hole facing Biden and the Fed https://www.reuters.com/graphics/USA-ECONOMY/JOBS/jbyprzlrqpe/chart.png
Graphic: A new golden age? https://www.reuters.com/graphics/USA-FED/JOBS/xmvjkrnmbpr/chart.png
The opinions expressed here are those of the author, a columnist for Reuters.
(by Mike Dolan, Twitter: @reutersMikeD; Editing by Josie Kao)
