When will the Market Rollover? | When will Central Bank Policy Shift?
Key readings indicate that the US economy appears to be seriously slowing down. Yesterday it was reports that US GDP was down -0.9% versus +0.3% expected. This marks the second consecutive quarter of GDP decline and under the dictionary definition of what a recession is it meets the definition, but there are other factors at play such as the labour market which remains very tight at approximately 3.5%
Anecdotally though there are a number of firms that are starting to pause hiring or slashing jobs all together. According to this Bloomberg article which compiles hiring announcements by major US corporations Google is pausing hiring, Amazon has expressed that it is cutting back, Apple is slowing hiring, Shopify is cutting 10% of jobs, Coinbase is cutting 18% of jobs, and it goes on and on.
My point here is that the unemployment is a lagging indicator and we may see softening in the coming months, and in fact initial jobless claims support this could happen. Some of these employees being laid off might find work elsewhere, but as things really begin to fall apart there won't be the job openings to maintain such a low unemployment rate.
At the same time keep we can see that while the overall inflation readings in the United States are going up underneath the hood core-inflation which does not include food and energy is starting to level off. Why is this important? Fuel is definitely impacted by geopolitical events that we're all aware of but so is food. If we were to look at the top 5 potash (or fertilizer) producers in the world it we've got Russia, and Ukraine; and the conflict between Russia and Ukraine is off course putting supply side pressure on world potash supply. The overall point here is that the inflation readings in two vital sectors do not appear to be primarily demand driven.
For instance indicators of actual fuel demand according to Bloomberg are at a low relative to the past couple years versus prices that are up, which would lead one to reasonably conclude that the reason for the price increases are primarily supply driven.
Lastly, there is the ISM or purchasing managers index (PMI). Usually with this index if it is above 50 it means the manufacturing economy is growing and if it below 50 then it is contracting. It's more or less fallen off a cliff the last few months from the low 60s all the way to the low 50s. Over the past 10 years outside of COVID we haven't seen such a sudden drop in this metric.
In summary, I would say it is clear that there is something happening here. The wheels are starting to fall off. Whether inflation persists for reasons outside of demand who knows, but there is no doubt that the demand side driving higher prices is starting to soften, and if I had to make a market prediction I would think come September or November there will be a shift in interest rate policy whether inflation has actually come down or not.