Morning Notes — Yield Curve and Economic Outlook

The US economy seems to be in unchartered waters, with certain elements (tight labor markets/unusual inflation pressures) associated with late cycle dynamics, while other elements (private sector balance sheets/spending levels) are typically witnessed early in an economic recovery. The elevated inflation data/elevated oil prices has some people adopting the stagflation template from the 1970s. Dusting off a 50-year old template to use against an unprecedented economic background seems like the wrong thing to do.  Last week, we explained why stagflation is an unlikely outcome.  Recession risk associated with a Fed policy mistake would also require the Fed to hike rates far beyond what’s priced into the market over the next two years. Staying in the market’s 9-month forward window, we see a much higher probability for growth to reaccelerate in the second half of the year. Markets were closed on Friday when the April Empire Manufacturing Index increased 36.4 points to 24.6 vs. consensus for 1.0. Details of the report showed strong growth in new orders and shipments with unfilled orders also increasing.