Deep breath now:
Last week’s gloomy US and European PMI numbers suggest “a sharp downturn” in both regions, says Ben Seager-Scott of advisory group Evelyn Partners. “But bad news might be good news” if that means central banks no longer have to tighten as hard and fast as originally planned.
Business expectations across the UK might be at their lowest ebb since May 2020, but fear not! “Growing evidence pointing towards a weakening real economy could slow the path of Bank of England rate rises,” says Adrian Lowery, analyst at investing platform Bestinvest.
Florian Ielpo at Lombard Odier said last week’s decelerating macro data had boosted market valuations; analysts at ING noted that Jay Powell’s recession-mongering was “good news” for equities; while Solita Marcelli at UBS Global Wealth said almost exactly the same.
In topsy-turvy marketland, talk of an impending recession and the likely hit to employment was enough to push the S&P 500 to its first week of gains in a month. The previously runaway S&P GSCI Commodity Index, on the other hand, fell 2.6 per cent, while 5 and 10-year US break-evens slipped further from their early-spring highs.
As Charlie McElliot at Nomura writes, US policymakers now seem to be pushing the Fed to prioritise growth over fighting inflation — a shift encapsulated by senator Elizabeth Warren’s grilling of Jay Powell last week.
“Inflation is like an illness,” she said . . .
. . . and the medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse. Right now, the Fed has no control over the main drivers of rising prices, but the Fed can slow demand by getting a lot of people fired and making families poorer. While President Biden is working to increase energy supplies, straighten out supply chain kinks and break up monopolies and bring down prices, you could actually tip this economy into recession.
In other words, policymakers still hope there will be a so-called soft landing, and inflation will slow without a recession induced by an overzealous Fed. Yet there remains a risk that economies could end up with the worst of both worlds.
The Bank for International Settlements on Monday laid out the danger as follows:
The mix of high inflation, high and volatile commodity prices and significant geopolitical tensions bears an uncomfortable resemblance to past episodes of global stagflation. An uncertain growth outlook in China reinforces the downside risks. Unlike in the past, stagflation today would occur alongside heightened financial vulnerabilities, including stretched asset prices and high debt levels, which could magnify any growth slowdown.
In such an environment, “bad news” might still be just that.