Yay, We Might Be in a Recession!

Goldilocks in a Suit struck again yesterday. Using his particular skill at moderating his comments during post-FOMC press conferences, he dished out economic porridge that was just right – not cold enough to be recessionary, but with inflation not too hot to require extreme measures. Traders lapped it up, with the S&P 500 Index (SPX) shooting 2.6% higher. The NASDAQ 100 (NDX), already enjoying worse-than-expected but nonetheless well-received results from Microsoft (MSFT) and Alphabet (GOOG, GOOGL) before the meeting, closed up a stellar 4.3%. Talk about socially acceptable volatility!

If you ever doubted that stock traders are a liquidity addicted mob, desperately awaiting any news that might bring them sweet relief from the current phase of withdrawal, yesterday’s rally should put any contrary illusions to rest. Even as Chair Powell reconfirmed that the Fed will be accelerating its pace of balance sheet reduction to $95 billion per month — withdrawing liquidity via quantitative tightening – the thought that an economic slowdown might, just might, bring an end to rate hikes was more than enough to spur enthusiasm.

Now that bad news is officially good news to the liquidity-addicted, it should come as little shock this morning’s -0.9% GDP reading was taken in relative stride by stock traders even though the consensus estimate was for 0.4%. Maybe, like us, they were following the Atlanta Fed’s GDPNow estimate of -1.2%. Either way, this second consecutive quarter of negative GDP now puts recession talk into the forefront. In common parlance we have a recession when we have two negative quarters. Yet a recession isn’t official until the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee says it is. A “dating committee” sounds like a clique of the in-crowd at high school. This group is certainly exclusive but doesn’t sound nearly as fun. While we await their pronouncement, we can instead content ourselves with Powell’s assertion that we’re not in a recession. The porridge is cooling, just not that quickly. And with Core PCE coming in at an as expected 4.4%, it’s down from last quarter’s 5.2%. We’re still well above the Fed’s inflation target, but hey, it’s slowing.

Official recession or not, the bond market is not hanging around waiting for a pronouncement. Two- and ten-year Treasury yields are down about 15 basis points since the FOMC, with a 21 basis point inversion between the two. Since the last Fed meeting, 2-year yields have fallen by about 60 basis points and 10-years have fallen about 70 even as the Fed Funds rate was hike by 1.5%. There are vastly different economic messages being sent by stocks and bonds, and they can only be reconciled if we accept that equity investors remain more fixated upon hopes for Fed liquidity than the actual state of the economy. Careful what we wish for.

By now, many of you know my propensity for using songs to illustrate my thinking. The first that came to mind was “The Boxer”, by Simon and Garfunkel. The line “a man hears what he wants to hear and disregards the rest” seemed to perfectly describe traders’ reaction to the Powell presser. Yet I keep coming back to “Waiting For the Man” by the Velvet Underground. It offers an even grittier view of New York City, as seen through the eyes of a drug addict anxiously awaiting his next fix. If Fed Chairs could have walk-up music for their press conferences, this would be the one I would suggest.