Notes on the Week Ahead

Waiting for a Negative

I have a sad tale to relate.  After dodging Covid for the last three years, my wife Sari and I were at a wedding two weeks ago and the virus decided to crash the party.  Two days later, I tested positive and Sari tested negative.  I’ll spare you the grim details, since almost everyone has had a similar experience.  However, despite only mild and fleeting symptoms, I experienced a rebound and so I’m sitting alone, testing daily, and waiting for a negative so I can return to society.

Investors in 2023 have also been waiting for a negative.  Waiting to see if economic growth would turn negative.  Waiting for a well-established negative trend on inflation.  And waiting for the Federal Reserve to perceive enough general negativity to stop raising interest rates.  As the first half of the year draws to a close, the wait continues.  However, in rather sharp contrast to my predicament, there is plenty that investors can do while they wait.

The Recession Questions: Yes, No, When and How Bad?

One of the advantages of being back in the office, when I am actually in the office, is I get to hear a variety of opinions.  These opinions are sharply divided today on the issue of a U.S. recession.  One camp feels that recession is inevitable.  Another sees a path to a “soft-landing”.  Of course, this argument really refers to a recession starting in the next quarter or two.  Sooner or later, a recession will occur. However, that brings up other questions, namely, when will a recession start, how deep will it be and how long will it last? 

Cooler Inflation and Slower Growth should Convert a Fed Skip into a Fed Pause

Markets in the week ahead will be focused on Wednesday’s FOMC meeting. We expect the Fed to leave the federal funds rate unchanged although both the post-meeting statement and the dot plot will likely emphasize that inaction this week should be considered “skipping a rate hike” rather than putting an end to monetary tightening. Indeed, Fed communications could explicitly warn of a possible further rate hike in July. On balance, however, cooling data on inflation and growth between now and that meeting should be enough to convince the Fed that no further tightening is warranted. Some of these data will be released this week.

The Steady Normalization of the U.S. Labor Market

In 1787, on the last day of the Constitutional Convention, a lady asked Benjamin Franklin what form of government had been agreed to.  He famously replied, “A Republic – if you can keep it”.  He was, of course, alluding to the danger that partisanship or ill-advised policies could yet return the young country to the monarchy it had so recently escaped. 

Sizing up the angles on Fed policy

I am shockingly, comically bad at golf.  However, that doesn’t stop me from occasionally watching more gifted souls play the game. 

One of their techniques is to examine a putt from multiple perspectives.  They take a careful look at the green as they come up to mark their ball, look at the putt from the side, squat down to consider it from the opposite direction, and generally scout out the lay of the land from all angles.  For myself, since I’m generally wielding the putter playing my seventh or eighth, I don’t further test the patience of my companions with such preparations.  However, I will admit that, for the average golfer, looking at a putt from multiple angles yields useful information.

A similar rationale can be applied to monetary policy decisions.  Changes in monetary policy are among the most important drivers of stock and bond returns.  Consequently, one of the questions we are asked most frequently is where will the federal funds rate be at the end of the year?

Slow-Motion Slowdown

Across the economy, the outlook is for slower growth.  Slower growth in demand, in employment, in profits and in inflation.  Recession is by no means certain.  However, a slow-growing economy is rather like a slow-moving bicycle – the slower its moves, the easier it is to topple it over.  And so, in the spring of 2023, there is a significant risk of recession starting before the end of the year. 

Debt-Ceiling Cliff Dancing

On Ireland’s Atlantic seaboard, ten miles west of the town of Lisdoonvarna, stand the majestic Cliffs of Moher.  They are a popular tourist attraction but also a dangerous one – in the 25 years ended in 2017, 66 people tragically plunged over the cliffs to their death.

Of course, there is no reason why anyone should meet such a fate.  The long grassy path beside the cliffs is bounded by a wire fence, with frequent signs warning visitors not to cross it or to venture any closer to the cliffs.  However, inevitably a few foolishly ignore the warning and, for a few of them, it is their last bit of foolishness on this earth

When Money Stops Talking

The quantity of money was a big issue in the background of my childhood. There were no money machines or credit cards (at least in our house). So every Monday, my father would write a check for cash, usually for less than 100 pounds, and hand it to my mother for housekeeping for the week. She would then drive to the bank, cash it, put the notes in her purse and slowly dole them out as the days went by and she tried to keep a family of seven fed. Throughout the week, as she shopped and worried, she would know how much, to the penny, was left. The quantity of money was a binding constraint in her life.

The Road Back to 2% Inflation

It seems like a distant memory now, but in the decade before the pandemic, the main preoccupation of the Federal Reserve was boosting inflation, as measured by the headline personal consumption deflator, to 2%.  Inflation undershot this target in ten of the twelve years between 2008 and 2019. 

The Real Threat to Dollar Dominance

Eliud Kipchoge, the only man to ever run a marathon in under two hours, is in town for next week’s Boston Marathon. In the runup to the race, reporters will no doubt ask him about whether he is worried about any particular competitor. He will predictably reply that he is not - but that he has to focus on his own fitness and his own decisions in running the race. As with all individual sports, the keys to success or failure lie largely in the athlete’s own hands.