My fundamental view is unchanged. I think this is a soft patch rather than an impending slowdown. However, my certainty on this reversing imminently is lessened somewhat by the Atlanta Fed GDP number falling from 3.5% to 1.8% in a week. ISM was surprising but then again the surveys have been random and useless all cycle. What I think many are missing is that it is inflation that is increasingly biting everyone, from consumers to corporate sector. It seems across the economy, there is just anxiety over not only the absolute level of prices (which the CB cannot do anything about) but also the rebound in inflation this year.
Remember, as inflation came down, nominal GDP stayed static and strong but real GDP improved. This felt really good for everyone last year. A bounce in inflation of ~1% has now caused the opposite; bad vibes, and real GDP down. It’s unclear if nominal GDP is heading lower or again if just a softer month.
I think the markets are interpreting this the wrong way. With sticky inflation, it is a sign the Central Bank’s job is incomplete, so bonds should not be rallying. The market looks at everything as a reason for disinflation, which is part of the problem as it prevents it! It’s possible growth softening would lead to inflation softening as well, but that’s too far down the road to have certainty about that now. Even Nick T was on CNBC last night indicating the path to soft landing has narrowed, and to expect a quiet FOMC for a few months. Thus, rate cut pricing cannot extend too far or it risks being offsides to the dots next week, and the long end has major supply issues to deal with.
With growth softer (whether soft patch or more permanent), it is equities that should bear the brunt, and commodities. We are seeing the latter, not much of the former.