How quickly the narrative has shifted back and forth in the money and bond markets. Over the last month—if not week—or so, the focus has gone from concerns of 40-year inflation to the possibility of a recession. Unfortunately, it looks like investors, as well as the Fed, are going to be confronted with this debate for the foreseeable future.
Chair Powell laid out in unequivocal terms last week that the Fed’s primary goal is to reduce inflation pressures, and the policy maker’s commitment is “unconditional.” This is exactly what has the markets fearful; i.e., the Fed will raise rates too high and ultimately push the economy into a recession. If there is a “silver lining” in the outlook, it’s the fact that the economy was in a healthy, if not rather solid, position in some sectors as the Fed rate hikes got underway. However, the odds of a “policy mistake” do appear to be elevated, and the markets “have seen this movie before.”
That brings us to the “clues” aspect of the analysis, or what leading economic indicators to observe, perhaps more closely than others. The May Leading Economic Indicators Index posted its third consecutive monthly decline, but it was very heavily concentrated in only three of the ten components that make up the overall gauge: stock prices, building permits and consumer expectations. Interestingly, these are the three areas that have garnered the most attention lately.
Now to the positive side of the ledger, specifically weekly jobless claims. Admittedly, there have been some increases of late, but the rise has come off the lowest reading since 1968. In fact, the level as of this writing—229,000—remains on the low end of the scale on a historical basis. To provide perspective, the long-run average since 1980 stands at 388,200, well above its present level. The current reading is even below the five-year pre-pandemic average of about 245,000, which itself was low historically.
