The phrase “recession deniers” has popped up, as though economic measurement is a political theme

Outlook: A little risk-off never hurt anyone and makes a regular appearance on a Tuesday. Now that the US scored some points on the geopolitical stage, it’s only respectful to suspend a slow-motion sell-off for a while. Equities down, gold up, all is right with the world or at least it seems to make some kind of sense. Unless you are bound up in a yen trade, which rolls merrily on without rhyme nor reason. We can’t wait for a break in the 10-year differential to see what happens.

It may take a while. See the chart from Bloomberg depicting the BoA forecast for the 10-year–a slide to 2%. Good grief! With Fed funds expected at 3-3.5%, how can this make sense? Either the market is dead-wrong about the Fed’s resolve or wrong about how fast recession shows up. The phrase “recession deniers” has popped up, as though economic measurement is a political theme. The Economist magazine, by the way, favors the no-recession verdict of two negative quarters.

Now check out the dollar/yen against the 10-year differential. The relationship is fairly clear and implies that if the dollar/yen is leading this time, the sell-off against the yen is a carry-trade closure in anticipation of exactly what the BoA forecast holds. This is very hard to wrap your head around. Actually, carry trades are hard to wrap you head around. Sentiment, squishy or not, is actually easier. But the point remains that selling the dollar on falling yields implies a lack of confidence in the resilience and robustness of the US economy on that other side of the Pacific, while the BoJ has set not only a cap, but also a floor, and is remarkably steadfast. We would put the odds of this outcome at low, but you can’t fight the tape.

Actually, what the yen traders are fighting is the Fed. Here the RBA language is useful–normalize but not on a pre-set path. We ignore that word normalize at our peril. When inflation is more than double or triple the recent norm, meaning 4-6-8%, “normalization” means bringing it back to everyone’s target rate, 2%. Never mind actual inflation was below 2% for quite some time. Two percent is the norm. If it took only one year for inflation to get there, what does that imply about how long it will take it fix it and how much the base rate has to rise to get the fix?

Alas, we can deduce nothing about how long or how much. Conditions are sufficiently different–Covid supply chain problems, Russia invasion–from past occasions that history is a poor guide. What we do know is that conditions can change dramatically and quickly. Check out that inventory subindex from the ISM again. And we still await the NY Fed’s Global Supply Chain Pressure Index, last updated for March (in May). Gimme a break. The Statistica series ends in January on the chart but the text shows a drop to 2.41 points in June from 2.9 points in May. You’d think we had better information on such a critical factor. Several reports have data without associated dates (like PwC).

Bottom line, the nay-sayers like the carry trade unwinders might be right. Inflation could be crashing lower–without triggering a recession (in the US, anyway)–and the central banks could be pulling in their horns early, by which we mean March 2023, not Dec 2023. We doubt it, of course. Granted, things can move quickly but inflation is sticky as all get-out, especially in places like housing–although even there we are seeing price drops. So the new risk is the risk that inflation is transitory, after all. This is a dangerous stance to take, it should go without saying.

Watch JOLTS today. Trading Economics expected the job openings to slip a little from over 11 million to 11 million on the dot. Recession? Ha.

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