Inflation and recession - can you have both?

Inflation Vs Recession

The battle between inflation and recession and what it all means for markets continue to play out in choppy trading conditions, with a market that can cut up bulls and bears alike. US PPI figures due today will be closely watched after jobs data yesterday hinted at a loosening in the labour market that may suggest the Fed could be closer to its pause/pivot. One leading indicator for global inflation cooled this morning - China producer inflation fell, down 1.3% year-on-year, whilst consumer inflation rose at its slowest pace in eight months, up 1.6% in line with forecasts. The PPI number does not make a trend and zero covid a factor here - PPI is likely to increase as the country reopens. The US number is expected to rise by 0.2% for the month in November for a 7.2% year-on-year increase, which would be a sharp drop from the 8% in the previous month.

Good News? Or Bad?

If inflation is easing, that’s one requirement for the Fed to start slowing the pace of hikes. The next would be the labour market – is it starting to cool, too? Initial weekly jobless claims rose to highest since February, whilst continuing claims also continued to march higher. This was definitely the kind of bad news is good news for stocks – Wall Street ended a dismal run, closing higher for the first time in days even as the data added to worries the US is heading for recession. But it would be too convenient to argue that the labour market has slackened off enough to get the Fed’s attention. Unemployment remains very low, and job vacancies very high. And inflation is going to be far stickier than what a slight cooling in the last month may indicate: plateau not peak. What if you get recession and inflation? That’s the thesis for 2023 – with a shortage of labour everywhere you get persistent, sticky high inflation coupled with recession. Central banks can’t get the genie back in the lamp.

Consumer Sentiment Largely Unchanged

In addition to November’s producer price index, the University of Michigan consumer sentiment index and inflation expectations data is out later. A month ago, the median expected year-ahead inflation rate was 4.9%, down slightly from 5.0% the prior month. Long run inflation expectations remained steady at 3.0%. The consumer sentiment data is expected to be barely changed at 56.9 from 56.8 before.

Europe Trading Flat

European stocks are flat in sloshy trading and heading to close the week lower by around 1%...as I said at the start of this week it was going to be sideways to a bit negative as the market bides time ahead of the massive central bank action next week. US futures are a bit higher after yesterday’s rally but still heading to end the week lower – the Nasdaq down 3.3% and the S&P 500 off by 2.65%.

Written in the Charts

The Cleveland Fed’s indirect consumer inflation expectations index has pulled back a touch but remains elevated.

And the 3month, 10yr yield curve inversion – which has indicated that last 8 recessions in the US – is at its deepest since 2001.

Meanwhile, in the eurozone the consumer does not think inflation has peaked. Median expectations for inflation over the next 12 months increased from 5.1% to 5.4%.

I was a day or two early in the call, but the MACD bearish crossover was confirmed at the touch of the trendline.

New lows for oil...recession fears seem to be the number one factor here even as China reopens. Collapse in futures spreads and spot into contango indicates cyclical downswing.

Cable – quite stretched here after bouncing off its 200-day SMA, possible MACD crossover forming.

Bear flag look about the dollar index chart, or perhaps more of a descending wedge? MACD is maybe turning over, and is at least flattening to indicate declining price momentum to the downside...200-day line offers the resistance now.