CoreMacro
| US
US macro analysis on the Fed, the consumer, and fiscal policy, and the investment calls that follow.
The signs of an approaching recession are starting to emerge. We will turn tactically defensive once they all fall into place.
We marked the first X on our Equity Downgrade Checklist and the latest JOLTS, Employment Situation and SLOOS releases brought us closer to ticking some others. We remain tactically neutral on equities but expect that we will underweight them as excess savings are further depleted, leading labor market indicators continue to soften and consumer credit performance continues to fray.
The latest edition of our Big Bank Beige Book suggests the expansion remains intact, though weakness in C’s private-label credit card portfolio could be a harbinger of distress among lower-income consumers. We remain tactically neutral with a bias to turn defensive once clearer signs of a recession emerge.
We look beneath headline data to assess the state of the labor market in cyclical goods-producing industries that have previously led overall nonfarm payrolls and in the services segments that have recently been leading the charge. The bottom-up view looks a lot like the top-down view: the labor market is softening, but very slowly, and offers no indications that a recession is at hand.
We are not yet ready to downgrade equities on a tactical basis but continue to expect we will eventually do so. We present a checklist of indicators that we are watching to determine when to de-risk.
Improved consumer morale will not compensate for the fading tailwinds to consumption. Neither will the wealth effects from higher stocks and home prices.
We feel as good about spurning the soft-landing narrative today as we did about spurning the recession narrative a year ago, but we are not giving into complacency. This week’s report looks at two key ways that we may be getting it wrong: by underestimating households’ asset support and the labor market’s durability. We remain tactically neutral but continue to look for opportunities to turn defensive.
Clients have been pushing back on our recession call on the grounds that it is incompatible with the economy’s second-half acceleration and the more recent easing in financial conditions. We examine both of those points in the course of doing some pushing back of our own.
Households have ramped up their cash holdings since the end of 2019, but the absence of an empirical link between cash and consumption leads us to believe that we’ve modestly overestimated the risk of consumer-driven overheating.
