Charts of the Week: Hard Landing?

Summary

• Beige Book sentiment on the US economy’s prospects is grim.
• Consensus GDP forecasts expect weaker growth in the US than EU.
• Spiraling wage inflation implies an aggressive Fed.
• Our recession predictor is advancing rapidly.

Bad Outlook in Beige Book

The latest Beige Book report released on 7 September shows a decrease in sentiment from the last report on 13 July (Chart 1). Sentiment neared the year lows of the 2 March release, matching the report’s conclusions: ‘The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months.’

Growth Prospects Grounded

Consensus forecasts project a weaker GDP growth outlook for the US than the EU (Chart 2). That is despite the Russia-Ukraine war playing far more direct havoc with European economies than that of the US. Bilal reveals his latest thoughts on our EUR/USD trade here. The short of it is we are still short. 

Inflation Shock Puts Pressure on Fed

The surprisingly hot inflation reading on Tuesday, coming in at 8.3% YoY for August against 8.1% expected, has dashed hopes of cooling price pressures. More problematically, the wage-price spiral is in full bloom (Chart 3). This places further pressure on the Fed to go hard at the upcoming policy meeting. Following the CPI print, markets are now pricing an 85bp hike this month, i.e., a 20% chance of a 100bp hike and 188bp by end-year. Dominique expect 75bp and reviews the print here.

Recession Is (Very) Likely

With inflation stubbornly persistent and a Fed under the gun to control it, we see them ultimately hiking much higher than currently priced. Dominique expects a terminal FFR of 8%, dramatically increasing the chance of a hard landing in H2 2023. Meanwhile, our recession model, which uses the 2Y10Y part of the yield curve, assigns a 70% chance of a recession within the next 12 months (Chart 4).

Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)