Recession Watch: Can US Consumers Keep Market Optimism Afloat?
Apr 14, 2023
Financial markets need happy US consumers to sustain an impressive recovery from the SVB-marked banking crisis. Incoming retail sales and consumer confidence data will show if they'll get them.
It is almost difficult to fathom how much has happened across markets in the past month, with next to no directional progress to show for all of it. The S&P 500 index of US-listed stocks – a bellwether for global risk appetite – sits within just 0.5 percent of where it was at the start of February.
That month, a run of better-than-expected US economic data revved up Fed rate hike expectations. Investors began pricing in a tightening cycle where the Fed Funds rate peaked in the 5.50-5.75 percent range and held above the 5 percent threshold well into 2024.
As hawkish speculation spread and credit conditions tightened, a levee broke. Silicon Valley Bank (SVB) collapsed as rising yields drove losses on its asset portfolio and sparked solvency fears, triggering a bank run. When the dust settled, Signature Bank was no more, and Credit Suisse was forced into a marriage with larger rival UBS.
By mid-March, all this pressure amounted to evaporating Fed rate hike odds and a drop of close to 9 percent for US stocks. Over the subsequent month, those losses were erased. The rebound came as a curious divergence spurred on risk-taking: credit crisis worries eased, but the dovish shift in monetary policy expectations stuck.
Now, traders are left to wonder about the durability of this rosy setup.
If the SVB-themed debacle meant the Fed has overtightened, evidence confirming as much seems scant. The 2-year breakeven rate – a measure of expected inflation priced into the bond market – remains tellingly above the 2 percent target. If shaking off credit stress allows the economy to accelerate anew, keeping a lid on rates will be difficult.
On the other hand, if a recent soft patch in economic data outcomes amounts to more than a temporary jolt, sentiment may slump alongside growth. Minutes from last month’s FOMC meeting flagged expectations of a mild recession and a Bloomberg survey of economists puts the likelihood of one within 1 year at a commanding 65 percent.
With that in mind, markets are understandably sensitive in the face of economic data as traders search for clues about next steps. The next batch in focus features the March edition of the US retail sales report as well as April’s preliminary University of Michigan survey of US consumer confidence.
These outcomes will offer a view into household consumption, which is by far the largest driver of US GDP growth. Middling outcomes are expected: a 0.4 percent monthly decline in receipts and a slight backing-down on the sentiment gauge are anticipated.
Outcomes near forecasts that underpin the status quo may get a risk-on response from markets. A downside surprise echoing recent disappointments may fuel recession fears, while unexpectedly strong results may weaken the “dovish Fed” argument. In either of those cases, stocks and other pro-risk assets may end up on the defensive.
Ilya Spivak is the Head of Global Macro at tastylive, where he hosts Macro Money every week, Monday-Thursday.
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