Bonds and stocks are sending different signals right now, and it is hard to tell which side is correct. Bonds are reflecting an increasingly bearish outlook on the economy, with yields falling. Stocks, on the other hand, have been jubilant so far this year. The reality is that both sides cannot be correct. Historically speaking, bonds have usually been more astute is measuring the direction of the economy and markets, and if that is the case, then we would be headed for a downturn.
FINSUM: The Fed really weighed in with its view yesterday and they are clearly worried about the direction of the economy. Are bond investors right again?
Bloomberg has put out a very bearish article on the economy. The publication is arguing that there is a 2/3 chance of a recession beginning this year, and that a bear market is likely to happen alongside it. As evidence of the pending downturn, the article cites these as indicators: the nearly inverted yield curve, the big fall in stocks in Q4, weak housing activity, terrible February payrolls, and the fact that the rest of the world is slowing. One of the most acute worries though is that the Fed will keep hiking as part of an effort to leave itself room to cut rates in the next recession, an action which could drive the economy into a recession.
FINSUM: Again, much of the direction of assets and the economy depends on the Fed’s mindset. If the central bank returns to hiking, a recession looks like a sure thing. But if not, it is far from certain.
Investors are anxious about the chances of a recession right now. While the Fed doesn’t seem likely to hike us into one any longer, economic fundamentals have just begun to show cracks. It started with housing, then job growth for February, and now it is jobless claims. Jobless claims rose by 6,000 last week after a long stretch of falling numbers. Weekly numbers are seen as less reliable than monthly figures because of random gyrations, but the data could indicate the economy is starting to soften.
FINSUM: It is too early to tell whether this is indicative of a coming softening or just an aberration, but certainly something to pay attention to.
In one of the most alarming bits of news we have seen about the economy is some time, new data out on the hiring market is showing a bleak trend. The US economy almost failed to produce any new jobs in February, with the total job creation figure at just 20,000. That is a major step down from the hundreds of thousands of new jobs investors had been used to seeing each month. The number is a meteoric fall from the 311,000 created in January, and way under the forecast of 180,000. Following the data, a senior member of the Fed reiterated that the central bank should take no actions on rates until at least the middle of the year.
FINSUM: This is very scary, but there is an important motto to remember here—one point does not a trend make.
New payroll data has just been released and it is not saying anything positive about the underlying economy. According to ADP payroll figures, the US economy created 183,000 jobs in February, under estimates of 190,000 and well below the total of 300,000 in January. According to Moody’s analytics, “The economy has throttled back and so too has job growth”. The slowdown is most acute in the retail and travel industries and at smaller companies.
FINSUM: This is a pretty sharp pullback from January. The total number is still positive, but it will be interesting to see if this becomes a trend.