Macro Memo: Will Schrödinger’s Soft Landing Strike Again?

<Insert Generic Market Fear on Halloween Pun Here>

In our last proper macro monthly, we anticipated that the Fed would cut the benchmark rate by 50 bps in one fell swoop to inject a dose of confidence into the economy and positively jolt the national narrative. This was against the backdrop of a seemingly steadily weakening labor market with rising unemployment, falling job openings and shrinking monthly NFPs. We also predicted that what we were experiencing was not the start of a genuine recession but merely a “growth scare.” 

Both of those expectations proved prescient, as did our immediate change in footing from betting on lower rates in the front end as that 50bps cut got priced in (and a lot more - to a ridiculous degree) to betting against any further 50bps cuts this year and higher rates in SFRZ5. 

We have since received news that the US labor market remains stronger than expected. US Q2 real GDP ran at SAAR 3% and Atlanta Fed’s NowCast has Q3 GDP at 3.43%! In fact, the latest US jobs report for September also saw upward revisions to July and August. The rise in initial jobless claims were merely tracking seasonality. Continuing claims continue to trend down with seasonality.

Since the Fed’s rate cut and the successively positive growth (inflationary) news, the US 10y yield has risen some 60 bps from ~3.62% to ~4.28%, and all the private costs of credit rose as well, from mortgage rates to business loans. 

We have also received news that core inflation by various measures remains stubbornly elevated above the 2% target, which in turn constrains the Fed’s ability to reduce interest rates aggressively. As if all of this isn’t enough, we will have a presidential election in just under a week, which is supposed to upend all of our lives or, at the very least, test our collective resolve in the fact that nothing ever happens. 

The narrative suddenly went from recession or growth scare to inflationary re-acceleration, replete with talk of bankrupting fiscal deficits, bond vigilantes…I think I even heard someone say stagflation again?

Our base case, generally soft but occasionally bumpy landing characterized by gross bidirectional market overreactions in response to noisy and/or confusing economic data that we’ve termed “Schrodinger’s Recession”, has us on the lookout for another reversal.

As far as we’re concerned, Schrodinger’s Recession continues - I don’t know who, but someone looked at the econo-cat and, for now, it’s alive. But this is just a stop along the way.