The recent stock market stumble questions the rosy scenario of lower inflation, a peak in interest rates and a soft economic landing.
Markets now seem more frightened of a strong US economy forcing the Fed to keep rates higher for longer.
But the US yield curve is still steeply inverted, a traditional recession warning, while Transport stocks are flagging, and consensus earnings forecasts are in retreat.
“The rally in share prices around the world since October has been stoked by hopes that inflation would gently decelerate, interest rate hikes would stop and then become rate cuts and as a result the global economy would suffer nothing worse than a soft landing, or even start to soar once more after avoiding an encounter with the ground altogether,” says AJ Bell investment director Russ Mould. “But investors are starting to wonder once more whether such a golden trifecta is likely as economic data proves resilient, inflation (excluding energy) a little sticky and central bank policymakers continue to talk a tough game. The markets’ current preoccupation therefore seems to be that good news for the economy is therefore bad news for asset prices, as it may force interest rates to go higher for longer than hoped, but the risk of recession is still one that cannot be dismissed lightly, either.
“Although China is reopening, the key to this debate may well be the USA, the world’s largest economy and one useful exercise may be to try and block out 2020 to 2022 altogether, given the extraordinary challenge posed by COVID-19 and the massive amount of monetary and fiscal stimulus (let alone scientific research) that were deployed to beat it off.
“Think back to 2019. The US economy was losing momentum and then President Trump was trying to goose it into life before 2020’s election, not least by leaning on the Federal Reserve to keep policy loose. It can be argued that the US is now returning to that trajectory as the Fed steps away from ultra-loose policy, Capitol Hill stops authorising stimulus cheques and the debt taken on during 2020-22 starts to weigh.