It seems we’re in a rinse-and-repeat cycle as now economists are finding themselves back in the habit of reassuring investors that the U.S. is not about to be plunged into a US recession. The May jobs report and weak manufacturing data have caused the Federal Reserve to delay the next rate hike. Chairperson Janet Yellen’s comments on Monday were more of the same things she’s been saying for some time but with one key omission: the words “in the coming months.”
US Recession signal? Much from missing words
Yellen spoke those words as recently as last month, so the markets are making much of the fact that they were missing from Monday’s speech at the World Affairs Council of Philadelphia. The Fed chairperson still expects to raise rates gradually, but the central bank won’t do so in June. Although a July hike is possible, it’s now less likely. A hike could come in September, but only if the economic data improves before then.
First Franklin Financial Services Chief Market Strategist Brett Ewing believes Yellen’s comments on Monday demonstrated to Mr. Market that the Fed won’t just keep raising interest rates no matter what happens. In commentary emailed to ValueWalk, he said he believes policy makers learned “the hard way” following the December rate hike, which “produced one of the worst-two-months sell-offs in history.”
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“While there is a risk of an overreaction to single reports and weakness being one-offs, it also gives the Fed presidents a reason to take a wait and see approach,” Ewing said. “The proof of this approach should find its way into new Fed speak in the coming months. In our view, the Fed has finally learned what it means to be data dependent and with the data this weak, one would have to be properly senile to believe rates need to be raised in the face of it.”
Ewing believes that the Fed must “get behind inflation,” which he said results in risk assets being bid up “because of a possible new inflationary spiral. This, in turn, will cause pension funds and insurers to place more of their assets into yield, he explained, so he still believes the weak dollar trade is “in play,” particularly in Emerging Markets, Industrial and Cyclical.
Troubling data points do not signal US recession
Murmurings about recession are starting to pop up again because the latest data shows that the U.S. economy is still staggering. Capital Economics noted in a report on Monday that the inventory-to-sales ratio climbed while payrolls disappointed. The firm said the ratio’s increase does not signal that a recession is “imminent.” Capital Economics explained that much of the rise that has come over the last few years is the result of a “compositional shift, as autos become more important and petroleum becomes less important.”
In another report on Friday, the firm also attempted to reassure investors that the U.S. is not about to be plunged into recession despite the growing mound of troubling data. It explained that GDP growth accelerated in the second quarter and that all other indicators from the labor market “remain at healthy levels.” Further, Capital Economics described payrolls as “notoriously volatile,” with several cases over the last few years when job additions fell below 100,000 but then rebounded the following month.
The firm’s stance runs counter to views by many other well-known firms and investors, such as Crispen Odey, who said last month when Fed commentary was very hawkish that a major recession is coming soon.