Displaying items by tag: recession

(Washington)

The Fed has a big new worry that is not presently on the market’s radar. With all the worries about headline economic data and the trade war, very little attention has been paid to the potential shock equities and bonds may feel from climate change. The Fed, however, is very focused on the risk. The Fed says that climate change can have a jarring effect on the economy that may “affect national economic output and employment”. “As such, these events may affect economic conditions, which we take into account in our assessment of the outlook for the economy”, says Fed Chairman Powell.

FINSUM: Calculating climate risk is tough because it can have short-term effects, but also much longer and more challenging ones, such as migration and agricultural output. That said, no one is expecting a climate change-induced financial crisis.

(New York)

One of the most famous names in bonds, Jeffrey Gundlach, has just put out a bold statement. Gundlach thinks there is forthcoming trouble in markets and he thinks it is the Fed’s fault. Specifically, Gundlach thinks the bond market is set for a lot of volatility. “interest rates cannot maintain the low volatility they have maintained over the last eight years”. To be clear, Gundlach is not calling for a recession, but says “But I am starting to think it is much less of a lock that there won’t be a recession before the next recession”.

FINSUM: There are two conflicting ideologies here. The Fed thinks volatility is largely an extension of the economy and policy, both of which it feels it can control to an extent. Gundlach and many other investors think there are underlying forces in the economy and markets that can only be pacified for so long. We think they are both right to an extent.

(New York)

So headline economic data has been good lately. Yet the markets are leaning towards a bearish view on the economy and a dovish view on the Fed. With such confusion, it is hard to figure out what might happen. Therefore, we are going to focus on some alternative economic indicators and today we found an interesting one: lumber prices are slumping badly at the time of year they are supposed to be rising. Lumber prices usually rise in the spring as builders stock up for construction. However, poor weather and a lack of construction is badly hurting prices. In May 2018 prices were at $639 per thousand board feet, now they are just $334, or down about 50%! Mills are cutting back production as a response.

FINSUM: That is a pretty alarming price drop and another sign that the underlying health of the real estate market is not good.

(New York)

The yield curve has been injecting fear into markets all year. Investors understandably panicked when the spreads between short-term and long-term Treasuries bonds inverted a few weeks ago. However, investors have been looking at the yield curve with the wrong lens, argues Barron’s. If you actually pay attention to what has been happening recently, you will see a distinct picture of spreads rising, which is a very bullish indicator. Moving averages on the spreads have been growing, the first instance of such in a long time. A number of macro factors are supportive of wider spreads, including a now dovish Fed and strongly rising oil prices, which have injected more fear of inflation.

FINSUM: We think spreads are headed in the right direction. Taken as a whole, the market is starting to look like a good buying opportunity right now. It seems odd to say given stocks are at an all-time high, but if you look at the back drop, the situation looks pretty bullish.

(New York)

For the last eight weeks or so we have been running a “recession watch” theme in articles, but the data is lately looking so good that we are feeling silly. New GDP data was released today and it was nothing short of a blowout. The US expanded 3.2% in the first quarter despite a government shutdown and winter weather. The growth was almost a full percentage point ahead of expectations and well beyond the 2.2% growth of the fourth quarter.

FINSUM: These recession fears seem pretty well put to bed in our opinion. Back in Q4, the declines in a number of indicators seemed to show we may be headed for a recession, but the strong reversal in data suggests this was just an aberration. The market doesn’t seem convinced, though, as Treasuries rallied on this news!