Inflation Cools, But Less Demand Doesn’t Mean Recession Imminent

Someone please tell America’s chickens that inflation is falling.

Inflation has fallen from nearly 9% in autumn to 6.5% currently. But weaker demand does not mean a recession is around the corner (though hopefully, it means egg prices will fall).

The strong job market means the Federal Reserve was right when it said higher rates wouldn’t crush the labor market. It’s not a red-hot economy. But it’s not recessionary either, as many market bears have been calling for the past several months.

“The inflation relief that we are seeing means we avoid recession in the first ,” says Vladimir Signorelli, head of Bretton Woods Research, a boutique research investment firm in New Jersey.

Some European Central Bank members are saying they are reaching the end of rate hikes by the first half of the year. And Mexico is saying rate hikes are coming to an end there, as well, after raising rates to 10.5% last month.

“Typically, you see rate reductions when an economy is heading into a recession and rates are not coming down, so I don’t think we are there yet,” says Signorelli. “Oil is steady. China is opening up. There is still enough growth that you will not see a recession.”

Inflation Redux: What the Market is Saying

What will the Fed do now? Considering their mandate is to fight inflation, and they managed to get it down by 200 basis points over the last year, markets expect more rate hikes. If the economy was recessionary, and jobs were being shed, rate hikes would be a disaster. But the job market seems strong, given the latest data from the Bureau of Labor Statistics showing just 3.5% unemployment.

“The current trajectory could deliver a softer landing, stronger jobs market and a less aggressive stance from the Fed,” says James Bentley, director of Financial Markets Online, a financial education website. “Other central bankers will be hoping it’s a sign of things to come for all major economies and that the medicine has worked.”

Vanguard senior economist Andrew Patterson said Thursday that he expects a 25 to 50 basis points rate hike next month.

Today’s data helped the S&P 500 and the MSCI Emerging Markets Index, both in sync this afternoon at around 0.6% higher than yesterday. Lower inflation will give investors a reason to pile in, but UBS’s Mark Haefele warns that rate hikes will put a cap on most equity gains in the months ahead.

“It’s too early for an imminent Fed pivot and the conditions are not yet in place for a sustainable equity rally,” he says.

The tight labor market will give the Fed a reason to keep raising rates, hoping to crush inflation. Food inflation has been the main problem in this latest CPI print.

Bulls beware. The global economy and U.S. corporate earnings might not yet fully reflect the impact of higher interest rates over the last few months.

The World Bank lowered its growth forecast on Wednesday to 1.7%, down from 3%.

For uber-bears awaiting fire and brimstone and gold used as cash to buy a dozen eggs at the local Wawa, that’s merely one step closer to zero.

But barring a worsening war situation in Ukraine, China’s reopening should keep global demand intact or higher. If China returns to its Zero Covid policy, the risk of a worldwide recession becomes more prevalent.

For now, “even if the Fed adds another 75 basis points, I think we escape recession,” says Signorelli. “They’ve been raising rates without any significant increase in employment. Their crystal ball on labor markets has been better than the market’s. For all the Fed’s critics, us included, their predictions on unemployment have been correct,” he says. “No recession this quarter. I’d be pretty confident making that call.”