Recent economic data showed surprising strength in the US service sector via the ISM services report and non-farm payrolls but markets are looking ahead and seeing weakness.
Here are the signs:
1) Bonds
The main tell is in the bond market where peak inflation is being priced in and there's a bid for safety. US 10-year yields have fallen to 3.49% from 4.43% in mid-October. There's never a better time to buy bonds than before a recession.
Jeff Gundlach argues US 10s should be another 100 bps lower and the inversion of the yield curve has been a sure sign of a recession in the past.
2) Stocks as well
There's been some push-and-pull with stocks on the Fed pivot but this week's move has been lower and right now earnings are forecast to fall just 5% next year. They could fall much more as margins are compressed and the consumer taps out.
3) Oil cratering
There have been some positive signs for oil in the past two weeks including tighter US inventories, a pipeline shutdown and China reopening but nothing is helping. WTI crude is down to $71.58, which is the lowest since last December. One of the classic trades into economic weakness is selling crude.
4) Banks are seeing softness
Banks get credit card data basically in real time and executives don't like what they're seeing.
“There is a slowdown happening, there’s no question about it,” said Wells Fargo CEO Charlie Scharf yesterday. “We are expecting a fairly weak economy throughout the entire [2023] year." Bank of America's CEO also highlighted slower spending in November.
5) Commodities
Commodity price changes over the past 12 months show that aside from natural gas (the least-economically sensitive commodity) and grains (the Ukraine war), commodities are flat or lower.
Natural Gas: +50%
Heating Oil: +23%
Soybeans: +17%
Corn: +9%
Silver: +2%
Zinc: +1%
Gold: +1%
WTI crude: -1%
Sugar: -2%
Gasoline: -3%
Wheat: -6%
Copper: -12%
Cotton: -23%
Coffee: -34%
Lumber: -54%
5) Long and variable lags
What the market is really saying is that global central banks have over-tightened or soon will. Some Fed officials argue that forward guidance and market changes render the lags shorter but everything is slowly falling into place for a poor economy in 2023 and markets are reacting accordingly. I think there's a window for a soft landing but if the Fed sticks to its plan to hold rates higher for longer and wait to see measure progress on inflation, it will be too late.
