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Here’s the pivot: JPM sees sharp slowdown in US economy, ‘no further hawkish developments from the Fed’

For much of the past month, we’ve been warning that the general investor public has been fascinated by growing speculation that the Fed will rise 4 times (or even “six or seven” times, thank you Jamie Dimon) and start cutting its balance. sheet, the US economy had quietly hit a major air pocket and – whether due to Omicron or because the vast majority of US consumers are being exploited again (see more below) – GDP growth US is now collapsing rapidly and could turn negative as early as this quarter or next as the US economy contracts for the first time since the covid shutdowns in Q1/Q2 2020.

Add to that the absence of a new Biden stimulus (BBB died like a doornail, courtesy of Manchin) and soaring gas prices (Goldman, Morgan Stanley and Bank of America are all seeing Brent hit triple digits in the short term, while a Russia- Ukraine war would send oil to $150 and bring down the global economy), and we are prepared to publicly declare that a recession ahead of November’s midterm elections is practically assured.

But while this is obviously an extremely upsetting sight at the moment, especially with the job market still supposedly lagging with near record numbers of job vacancies coupled with inflation still soaring, others are starting to notice…

…and the same goes for the bond market, which is traditionally the first to sniff out major inflection points in the market, and which, after hitting multi-year highs earlier this week, yields have suddenly fallen.

Nowhere is what is coming more clear than in the continued collapse of the yield curve which, at the 5s30 fulcrum, is only 30 basis points from where thought the Fed was when it ended its tightening cycle in 2018.

It is therefore with some surprise that we have read the latest weekly reports from the major banks where precisely this slowdown is increasingly reported. Consider the following from JPMorgan’s latest Fixed Income Strategy Note by Jay Barry (available to professional subscribers), who writes that JPMorgan’s Economic Activity Surprise Index (EASI) “tipped sharply into negative territory in recent weeks, indicating that data has underperformed consensus expectations.”

This was punctuated by December retail sales data, with the important control group falling 3.1% on the month (consensus: 0.0%).

Weak data, says JPM in favor of the Fed which, hoping to regain its ‘credibility’ after destroying it in 2021 when it said inflation was transitory and is now scrambling to correct its mistake, is now ready to crash the market just to reduce aggregate demand, “indicates that consumption should moderate in 1Q22.” And since consumption accounts for 70% of US GDP, guess what that does to overall US growth?

Or don’t guess and read what JPM expects now: “we expect growth to decelerate from a 7.0% q/q advance in 4Q21 to a 1.5% trend in 1Q22.“It’s not just retail sales, however, or this recent Empire Fed Manufacturing Survey, which just suffered its 3rd biggest monthly decline in history (with only March and April 2020 worst)…

… more locally, initial claims jumped 55,000 to 286,000 in the week ending January 15, their third straight increase and the highest weekly reading since October.

And while seasonal volatility in claims around the new year could amplify the upside, it was the survey week for January’s jobs report and portends much weaker payroll growth this month. -this. In fact, as we discussed in our commentary on the December jobs report, it is now likely that the January payroll will be negative.

Of course, one can blame Omicron’s peak in December for much of this slowdown, and many do – especially those who mistook the inflation surge in 2021 as a “transitional” phenomenon – and now use covid as a smokescreen to argue that the current downturn is transitory, but the reality is there’s a lot more to the current downturn, and Bank of America’s Michael Hartnett said it well on Friday when he said that the “End of the pandemic = recession in American consumption” (more here).

Here’s the conclusion of what BofA’s CIO said: “Retail sales are 22% above pre-COVID levels…

…payrolls up 18 million from lows, annualized inflation 9%, real incomes down 2.4%, stimulus payments to US households evaporating from $2.8 billion to $21-660 billion in 2022, with no excess US savings buffer (savings rate = 6.9%, below 7.7% in 2019 and the wealthy are accumulating the savings), and a record jump of $40 billion in monthly loans in November 21

… “shows that the American consumer is now starting to feel the pinch.”

Along with the realization that a covid exit means the US is entering a consumer recession, Hartnett admits that any Fed hike cycle will be short (that’s not sweet) and will be followed by an easing from 2023!. Indeed, according to Hartnett, while the broader economy certainly needs more hikes to contain inflation, it will take far fewer rate hikes to bring markets crashing down, because “when equities, the credit and housing markets have been conditioned for the indefinite pursuit of “lowest rates in 5000 years” could only take a few rate hikes to cause an event (own volatility)”.

And since Wall Street is still ahead of Main Street (sorry peasants), Hartnett believes that the current “rate shock” is the motive for impending “recession fear”, and as noted above, the Fed which engaging in a downturn guarantees not only a recession but also a market crisis.

The only question at this point is when will the Fed realize that it cannot raise rates enough to offset the surge in inflation which, by the way, is not demand driven. , but is due to persistent supply constraints, over which the Fed has no power!

That’s why JPMorgan economists are taking risks and perhaps seeking to reassure markets, writing that “next week’s FOMC meeting will not present the case for hawkish new developments”…. and “should only ratify expectations next week and not surprise market participants with another hawkish pivot.”

To put it all together, Goldman Sachs, which agrees with JPMorgan that there will be no hawkish surprises from the Fed, and wrote on Friday that the Fed would be more dovish than expected, and as such Goldman sees “the conditions in place for a big hedging rally in and around the FED next week and when fresh month-end capital returns to equity markets, along with the corporate powder dry.”

Of course, there’s always the risk that Joe Biden, now beyond the stun, confusion and terror of the next Democratic implosion after the mid-November election…

…does not realize how devastating a stock market crash will be for the US economy where financial assets are now 6.3 times greater than GDP…

…and will order Powell to keep rising and tightening just to break the back of inflation (as discussed above, and as Blackrock also recently noted, the Fed is completely powerless to stop inflation being driven by supply), even if it means destroying all the wealth effect the Fed has spent the last 13 years trying to create. In this case, all bets are off.

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