Rising Recession Concerns
October 12, 2023
Weekly jobless claims undershot consensus again, signaling ongoing strength in labor markets. There was nothing controversial in yesterday’s release of FOMC minutes with takeaways focused on the Fed’s well-understood higher-for-longer message. Recent comments from Fed officials acknowledge that tighter financial conditions (higher bond yields/higher dollar) are making the case for further rate hikes less urgent.
September core CPI came inline with expectations at +4.1% YoY, which is the lowest print in two years and down from +4.3% last month. However, headline CPI came in a bit hotter than expected, driven mostly by higher shelter costs.
The market is focused Fed implications with terminal rate expectations rising only slightly, while forward rate expectations begin to reflect increased likelihood of a policy mistake.
The overshoot in headline CPI came mostly from higher shelter prices, while the Fed’s preferred ‘super core’ rate that excludes housing declined to 3.91% YoY from 4.05% in August. In our opinion, today’s move in 10-year bond yields overstates the likelihood of a more active Fed. All high frequency data points to a continued disinflationary trend, while financial conditions tighten. We continue to see this period as a months-long transition to rising recession concerns. An inverted 2/10 yield curve has a perfect track record in predicting recessions 19-24 months after initial curve inversion. The current curve inversion is now 16 months old and we look for lower yields and lower stock prices in the months ahead.
Our tactically bearish outlook on the S&P 500 (SPX) is primarily based on weakness in cyclically-sensitive indices like the Russell 2000 (RTY) and equal-weight S&P 500 (SPW). The SPX is holding technical support levels based on the outperformance from a handful of mega-cap stocks. Crowding in stocks with the largest market caps is a defensive dynamic that tends to occur at the end of a cycle. VIX levels north of 22 or a break in the NYFANG Index below 7175 will likely trigger accelerated downside momentum and cause the SPX to overshoot our initial price objective near 4100.