The economy shows signs of exhaustion

Stocks rallied yesterday, overcoming early setbacks to snap a 4-day losing streak as investors applauded a weaker-than-expected GDP figure. The labor market remains strong according to the latest weekly employment report – the Fed may not like that.

When are we landing? Confused as ever? Don’t worry, you’re not alone. Wasn’t inflation supposed to go away by now? Why is the Fed so mad and raising rates like it was the 1980s? Well, unfortunately inflation is not gone just yet. It is easing slightly, but it is still dangerously high. We haven’t experienced inflation like this in like 4 decades, so it is not fresh in our memories. Let me remind you. It is very sticky and very tricky.

Inflation first peaked in that era during the mid-1970s, and the Fed responded, as expected, with rate hikes, bringing the Fed Funds rate to 13% in 1974. The US was in the midst of a recession, so the Fed quickly reversed course taking the Funds rate back down to 5.5%. Inflation, which peaked around +12% eased back to +4.9% after about 2 years. “Whew,” thought everyone collectively, “glad that is behind us.” But it wasn’t. In fact, inflation picked up once again in 1978 and 1979. The Fed slowly started to raise the Funds rate, but inflation appeared to be spiraling out of control, having reached its 1974 peak by late summer. President Carter had to do something. The former Fed Chair, William Millar became Secretary of Treasury, so Carter sought to fill the position with a bona fide inflation hawk, and he found it in Paul Volcker, then President of the New York Fed. Volcker was a known inflation fighter, and he proved his metal rather quickly. He was convinced that the Fed had acted too soon in bringing rates down in the late 1970s which led to the resurgence of inflation. The Fed, with Volcker at the helm, would bump rates up almost +9 percentage points inside of 6 months! Inflation had ratcheted to around +14% and the US was in a recession once again. What a mess? Do you remember? Let’s keep going. The recession in 1980 was a quick one, ending after just 2 quarters, but inflation was still high, so the Volcker Fed decided to employ what some of you may know as a “double tap”. That is what zombie hunters do to ensure that a zombie won’t get back up after being put down with the first shot. Call it an insurance policy . Volcker’s double tap was another rapid rise to 20% on the Funds rate in 1981. By early summer, the economy stalled into a recession once again. This time, the recession would last over a year. That was a bad one, indeed. It was so bad that it completely reset inflation [the crowd cheers], bringing it to around +2.5% by 1983. Volcker had killed inflation with resolve, super-high interest rates, and 2 painful recessions. Those would be considered hard landings. It took more than 3 years to bring it from its peak back down to tolerable levels.

Let’s get back to the 2020s. Inflation spiked and peaked last June at 9.5%. The Fed hiked rates by 4.75 percentage points to tackle the problem. A small move in the shadow of the Volcker campaign, but inflation is also -10 percentage points less than it was in those days. So, this is a scaled down version of the 1980s, but a problem, nonetheless. The current Fed Chair is a big fan of Volcker, and he has said as much. In fact, all Fed members, often citing him, are fearful of calling victory too soon. Recall that it took 3 years to eradicate it in the 1980s. This time around, inflation peaked less than a year ago. The good news this time around is that we have not stalled into a recession… yet. With the labor market remaining strong, and the economy moving forward, many are hopeful that a soft landing may be possible. If so, that landing could be still far away.

Yesterday morning a second revision of the Annualized Quarterly GDP Growth came out with a slight downward revision. The markets ultimately rallied on the less-than-good news, hoping that it would cause the Fed to tread a bit lighter. This morning we will get the PCE Deflator, which is expected to have bumped up a bit last month due to strong Personal Spending. This is the Fed’s favorite inflation gauge and members will surely be watching it more closely than even yesterday’s GDP figure. Let’s hope that they don’t consider the Volcker “double tap.”

WHAT’S SHAKIN’

Autodesk Inc (ADSK) shares are lower by -4.50% in the premarket after it announced EPS and Revenue beats for last quarter but offered weaker than expected guidance for the current quarter and full year. In the past 30 days 32% of analysts have changed their price targets, 9 up, 0 down, 19 unchanged. Potential average analyst target upside: +7.4%.

Warner Bros Discovery Inc (WBD) shares are lower by -3.88% in the premarket after the company announced that it missed EPS and Revenue targets by -540.27% and -1.96%. The company attributes the miss to declining ad revenue.  Potential average analyst target upside: +27.3%.

The Boeing Co (BA) shares are lower by -2.54% after the company temporarily halted deliveries of its 787 Dreamliner due to a documentation issue. The company said that the issue does not pose a safety issue for Dreamliners already in service. The company announced its Q4 earnings back in January and beat analysts’ estimates. Potential average analyst target upside: +9.6%.

YESTERDAY’S MARKETS

Stocks rallied off lows in the final 2 hours of trade to close in the green after traders viewed a weaker economic number as reason for the Fed to slow down on the hikes. The S&P500 climbed by +0.53%, the Dow Jones Industrial Average rose by +0.33%, the Nasdaq Composite Index jumped by +0.72%, and the Russell 2000 Index traded higher by +0.71%. Bonds climbed and 10-year Treasury Note yields slipped by -3 basis points to 3.87%. Cryptos rose by +1.34% and Bitcoin advanced by +0.30%.

NEXT UP

• Personal Income (Jan) is expected to have risen by +1.0% after growing by +0.2% in December.
• Personal Spending (Jan) may have climbed by +1.4% after falling by -0.2% in the prior period.
• PCE Deflator (Jan) is expected to come in at +5.0% even with the prior report.
• New Home Sales (Jan) are expected to have risen by +0.70% after a +2.3% rise in December.
• University of Michigan Sentiment (Feb) may come in at 66.4 in line with the prior estimate.
• Fed speakers today: Jefferson, Mester, Bullard, Collins, and Waller.
• Next week: still more earnings, more housing numbers, more regional Fed reports, Durable Goods Orders, Consumer Confidence, and PMIs. Check back on Monday for calendars and details.