The “R” word

Recession fears are escalating

The “R” word is being used more and more as recessionary winds start blowing more loudly through economic data and the price actions across the asset class spectrum. On Friday, US manufacturing and industrial production data were soft. That follows weaker US retail spending and housing market data previously. Even oil prices cracked under the weight of recession noise. A classic case perhaps, of high prices being the best cure for high prices?

US yields eased lower in response as well, but not by much. The US dollar remained firm while US equities had a mixed session. The Dow Jones edged lower while the S&P 500 edged higher, but the Nasdaq jumped by over 1.40%. One could argue that a recession in the US means less tightening, a boon for the interest-rate-sensitive Nasdaq. But as I mentioned last week, there were a galactic amount of options expiries on US equity markets on Friday, so take the price action with a grain of salt. A US holiday today will keep volumes thin.

In China today, iron ore, steel rebar and coal futures have all plummeted as local markets join the US ones in pricing in a slowdown. Chest thumping over the weekend by China around the Taiwan Strait, and legislation allowing Russian-style “special operations” won’t be giving regional Asia much comfort either.

You can choose from an extensive drop-down menu of recessionary drivers. Rising inflation and interest rates in the developed world, the Ukraine-Russia war and ensuing commodity disruption, the Covid-19 slowdown in China, and the list goes on. It is clear that sentiment is turning though and given the appalling track record of forecasting these past couple of years, the more central banks say, “soft landing,” the more nervous markets become, and rightly so.

Unfortunately, with all your monetary bullets fired and stagflation at your doorstep, as a central bank you don’t have any pleasant choices. Do nothing, and inflation continues to rise, but growth may not; expect protests on the streets. Hike rates to dampen inflation but with growth already slowing or falling, you know how the story ends. The best I see it is that the recession, when it arrives, is short and sharp and, at least in much of the developed world, it’s starting from a relatively high base.

Asset price volatility is an inevitable consequence as the street tries to price in the next direction of travel. Currency markets are saying the Fed won’t blink on rates. Bond markets are saying that too, although as US 1-years drop back below 3.0%, then perhaps they are wavering. Gold doesn’t seem to care. Oil is cracking like a refining spread, but has yet to reach my longer-term support lines, although we’re not far away. It would be ironic if falling energy prices from a recession torpedoed the funding for Vladimir Putin’s war machine.

Nowhere has been more frantic than the crypto space which endured some emotional volatility over the weekend as expected. Bitcoin fell 15-odd per cent on Saturday as support at USD 20,000.00 cracked, finishing 7.50% lower for the day at USD 18,955.00. It rallied yesterday by 8.40% to USD 20,550.00, only to fall 3.50% this morning after another Solend Labs, which allows you to lend or borrow in something called Solana, granted itself emergency powers to take over a (very) large account to manage its exposure. The more the merde hits the fan in the DeFi space, the less decentralised it seems to be becoming as reality bites. I can’t help but think of George Orwell’s Animal Farm. “All animals are created equal, but some are more equal than others.”

That said, the price action on Saturday looked very much like forced margin stop-outs triggered by the failure of the USD 20,000.00 support level. Yesterday’s price action suggests that as well. I don’t rule out a rally by cryptos this week as enough lambs appear to have been silenced for now. Equity markets in the real world may also have had the herd thinned enough temporarily.

Leaving central bank-induced speculative exuberance-based digital Ponzi schemes behind, for now, the week is somewhat thin on tier one data. China has left its One and Five-year Loan Prime Rates unchanged today and may have added fire to the local market commodity price falls. Markets appear disappointed that no stimulus crumbs were thrown to the markets, even a 5 or 10 basis point trim of the 5-year LPR. I still contend that China’s biggest short-term threat is more Covid-19 lockdowns. I’ll say it till I’m blue in the face, China is unlikely to be “one and done,” and the virus only has to get lucky once under Covid-zero.

Elsewhere in the Asia-Pacific, the Reserve Bank Of Australia Minutes will be released tomorrow, with markets picking over the carcass searching for any clues on the direction of RBA interest rate policy. How high, and for how long, will rates move higher? Friday’s Japan Inflation Rate will have more interest than any time over the last 20 years, I expect, as the Bank of Japan defied the word and maintained super-easy monetary policy last Friday.

We received a swath of PMI data from across the globe on Thursday. The US calendar sees New Home Sales tomorrow and Existing Home Sales on Friday. Both have downside risks and may add to the recessionary noise. The week’s highlight is likely to be testimony from Fed Chairman Jerome Powell on Wednesday and Thursday. But we also have a plethora of Fed speakers throughout the week as well. With a dearth of tier-1 data, Fed speakers are likely to drive intraday volatility, although it wouldn’t surprise me that after last week’s bonfire, risk assets in general consolidated higher this week. Either way, we can expect plenty of intraday noise, but ultimately directionless volatility this week in my opinion.

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