Milan Cacic
July 14, 2023
Money Economy Commentary Weekly update Weekly commentaryHARD LANDING, SOFT LANDING OR NO LANDING AT ALL?
The month over month consumer price index rose 0.2% in June while expectations were 0.3%. U.S. annualized inflation dropped to 3%, the lowest level in two years. For the first time in a while it appears the Federal Reserve has inflation under control. Just six months ago inflation was 6.4%. There are very few analysts who would have predicted that the Federal Reserve could raise rates from 0.25% to 5% all well the US economy continued to expand. This is exactly what happened.
I want to be clear that the Federal Reserve is still above its targeted rate of 2% however the trends are tracking well and it appears that the 2% target should be hit by the end of 2023. This bodes well for the second half of 2023 and reinforces bullish sentiment that we chatted about over the last few weeks.
Let's put all the pieces together
By definition, a recession is two consecutive quarters of negative GDP [gross domestic product]. It appears that the built up reserves that were generated during the pandemic has allowed the economy to grind higher with positive consumer sentiment. Below are some of the reasons why it looks like the US may not go into recession:
- The labour market is very tight and employees have strong negotiating power over wages.
- Equities have come off the bottom and market breadth is now expanding into cyclical stocks.
- Credit spreads have narrowed. This is a sign that lenders are comfortable with companies being able to pay back their debts. When credit spreads widen, it is usually a sign that we are going into a recession. The opposite is happening now.
- Inflation has come down and expectations are coming down with it.
- Industrials [planes, trains, automobiles and machinery] are all starting to go up. This is not a recessionary signal.
Overall this allows us to remain bullish for the second half of 2023. At the beginning of the year all anyone spoke about was whether or not there would be a hard or soft landing. Now it appears there is the potential for the economy to continue to grow and not have a hard or soft landing, but no landing at all!
I should note that the Bank of Canada raised the bank rate to 5% this week. What you may find interesting is that when the Bank of Canada raised the short-term rates the 2-year, 5-year, 10 year and 30 year interest rates all dropped. Basically, the bond market is telling us that it believes interest rates are coming down not up. Time will tell!
I've also included a piece from our CIBC Capital Markets team entitled "Energy Q2 preview and price deck update".
As always, if you have any questions please feel free to give us a call at any time.
Have a great weekend.
Milan