Talk of recession is just wrong, or at least premature

Outlook: We are struck dumb by the Fed delivering anti-inflationary policy and guidance, but markets are not sure it’s credible and the yield curve is flattening. See the chart. At the same time, the ECB is wibbly-wobbly and may not get to a hike this year at all, and yet the euro is hanging on to gains. What happened to interest rate differentials influencing if not determining exchange rates? The “dovish” hike in the UK is understandable and after a dead-cat bounce, so is the pending fall in sterling, but it “should” get some support vs. the euro.

Note the US has something in its corner—the robust and materialistic consumer. Yesterday the latest revision by the Atlanta Fed of Q1 GDP is 1.3%, up from 1.2% on March 16. This time to the consumer we can add less negative real gross private domestic investment growth, -4.2% from -4.9%. Now we wait for another one next Thursday. 

Note that our canary in the coal mine, the Australian dollar, is also signaling good global growth. Talk of recession is just wrong, or at least premature. 

If the usual metrics of economic growth and relative rate differentials, including real ones, are not having their usual influence, the drivers in FX must be change in risk sentiment on every passing breeze. This makes for an unstable and unpredictable market. We see forecasts of the euro rising back up over 1.1200, for example, apparently on chart interpretations. We can see that possibility, too, but can’t accept a long position in a currency whose issuing countries are at war, whether they admit it or not. Not only at war, but about to get rescued for the third time by the US.

The other party up in arms about this overly relaxed attitude is Goldman Sachs, which complains about current prices no longer reflecting more negative scenarios, according to Bloomberg.

This raises the vulnerability of asset prices to crashes if and when bad news comes along. In other words, markets are accepting bad news too calmly ahead of worse news. “Europe’s benchmark Stoxx Europe 600 index is close to erasing all of the losses sustained since Russia’s invasion of Ukraine on Feb. 24, while the S&P 500 is now trading higher than where it closed on the eve of the attack. European stocks have all but erased the losses incurred since the start of the war.” This is nuts.

“Under Goldman’s downside scenario, a severe disruption in gas flows from Russia could shave off 2.5 percentage points from European gross domestic product and 0.25 points from U.S. economic output this year. According to the strategists, a deterioration of the conflict could push the S&P 500 to 4,059 index points — a drop of almost 8% from Thursday’s close.

“Our downside case is no longer well reflected in many areas and it is now easier to identify potential hedges than it has been for several weeks,” the strategists said. Adjusting for options volatility, long oil positions stand out, while European assets now screen more favorably too as downside tail hedges, they said.” For example, the US warned Putin may threaten nuclear, but the Stoxx 600 opened little changed.

“Barclays Plc strategist Emmanuel Cau agrees with Goldman. ‘More substantial progress may be needed for the risk-on move to persist. Even if a truce were to happen soon, it is unclear whether sanctions on Russia will be lifted immediately. So the negative impact on growth and higher inflation will still materialize.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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