My macro view
What’s my overall thesis at this juncture?
It’s that the global economy is slowing and is likely to slow further before it picks up. The US is the laggard in this slowing but is affected as well. From a markets perspective, that means a convergence to zero, with yield curves flattening as nominal growth rates contract.
I didn’t mention the word recession of course. That’s because we’re not there yet, though I think we should be by the end of 2020. But, that’s a speculative call at this point. The near-term outlook doesn’t have a recession in it, at least for the US.
The latest data pieces
The last important pieces of data to come out sort of highlight the situation. Yesterday, we saw decent wage and income data. If you annualized the monthly gain, it would show 5 to 6% gains. That’s pretty darn good. The actual annual nominal gain is 4.9%.
Also notice how personal income growth tops out well before recession in July 2000 and in February 2006. Always look at the rate of growth, not the level for a read on directionality.
It’s the same for all cycles since 1960, with nominal personal income growth declining into the recession. But also notice that there are ‘false positives’ in that we see multiple mid-cycle declines in personal income growth that do NOT lead to recession. This is particularly true since the 1980s.
Then, there were the ADP numbers that came out today. Peter Boockvar did a great job in summing it up by saying,
“At least according to ADP the slowing pace of private sector job gains has become pretty clear. The 3 month average has slowed to just 103k vs the 6 month average of 157k, the 12 month average of 182k and which compares with the 2018 average of 219k.”
My summation of Peter’s analysis: Slowing, yes. Recession, no.
The Fed reaction function
So that leaves the Fed ready to cut 25 basis points as an insurance policy. I don’t think they’re worried about a recession. And they are less worried now than they might have been in May or June.
Even with a 25 basis point cut, we could see dissents from the likes of Loretta Mester and Eric Rosengren. So, it’s not clear to me the Fed has an internal mandate to cut further. It will be interesting to see what the vote is and how Powell positions the future moves of the Fed going forward.
For the last several years, I had been saying the Fed is tighter than you think. And that led right up to the Fed’s overtightening last year. But after the Powell Pivot in January, it seemed like the Fed had set out a new paradigm that gave them more flexibility in their approach. Even so, I wonder. I think the market will be disappointed in the Fed’s approach over the next several months unless the data deteriorate enough to give us another rate cut. Let’s see.
The Fed never went negative like the Europeans and Japanese have done. But, it is an option they would consider if the data weaken. I see this as desperation though. Look at the latest news out of Switzerland. UBS is planning negative interest rate for their rich clients. Essentially they are passing through the Swiss National Bank’s tax on reserves to a portion of their customer base.
Frankly, I think this is the signal that we are now approaching the limit of how long central banks can employ negative yields without banks passing through that tax to end customers. The ECB and SNB are effectively stopped out here. They have run the gauntlet of monetary policy measures. If their economies need policy stimulus, help won’t come from the central banks and interest rate policy.
This is definitely something to keep in mind if growth does continue to slow. I anticipate policymakers will continue to over-rely on monetary policy in Europe. And eventually there will be an economic crisis. Then we’ll have to see what the Europeans do.
I’m going to leave it there for now. Looking forward to the FOMC decision