The issue of negative interest rates has fueled concerns about recession and worries that the world’s central banks are running out of ammunition to prop up their respective economies. Most economists agree that we’re not currently in a recession, although their probability assumptions vary quite widely. They have managed to calm down investors slightly, although as more and more troubling metrics come pouring in, it becomes clearer why Mr. Market is so unsettled right now. Contradictory numbers have sent all asset classes into a tailspin.

Negative Interest Rates

Can the fragile economy sustain strong numbers?

There’s no doubt that we’re in a time of heightened volatility, and Gluskin Sheff Chief Economist and Strategist Dave Rosenberg explained why investors are so uneasy in his Feb. 22 “Breakfast with Dave” note. He highlighted the exceptionally heightened uncertainty of U.S. policy makers in a note last week, and it clearly hasn’t taken long for their uncertainty to bubble over into the rest of the markets.

He also noted recently that the jobs data has been strong, but he said on Monday that Mr. Market is worrying that the labor market’s strength is waning, which is seen as particularly important because some see it as the one thing holding up the U.S. economy. For one thing, Wal-Mart’s weak fourth quarter results highlighted that consumers aren’t feeling very safe as it marked the big box retailers first annual revenue decline since 1980, he said. The company also cut its sales guidance for this year, providing “evidence that the once-solid consumer is now on shakier footing,” Rosenberg wrote.

Mixed industrial data too

However, retail data in January appeared to be strong, and the economist said recently that investors would be well-advised to pay more attention to that data than to the weak Consumer Confidence Index, emphasizing that consumers typically vote more accurately with their wallets. Hence the metrics pertaining to retail sales and whether consumers feel stable is mixed right now.

Another area of strength that economists have been pointing to is activity data from the U.S. manufacturing industry. The January report suggested that it may have hit bottom, but again we have mixed data as the New York Fed and Philadelphia Fed both issued weak reports. Rosenberg noted that both are “well within contradictory territory on both an actual and an ISM-adjusted basis.”

Do we really have to worry about negative interest rates?

The Fed recently said it had been discussing a negative interest rate policy, and the markets were understandably spooked. However, talking about negative interest rates does not mean regulators are planning to do this. Part of the volatility right now is coming from debates about whether the Fed is going to reverse course and start cutting rates again, although that seems pretty far-fetched.

As far as negative interest rates, they certainly are the last-ditch effort being put forth by the world’s central banks, with more and more of them turning to a negative policy. For now though, U.S. policy makers are walking a fine line as they try to balance the fragile state of the economy with mixed data on just how strong it is. Negative interest rates could be the final blow to already-disheartened and weakened U.S. consumers, which is why Mr. Market is on the edge of his seat, biting his nails now.