The keyword remains “normalization”. 

Continuing to “normalize” the economy while walking on the right side of the fine line, across which momentum to the downside overshoots the target, is the current balancing act we’re facing.

Bad news has primarily continued to be interpreted by the market as bad news (i.e. a weakening economy is no longer a positive for stocks on hopes of triggering more cuts, but rather a negative on worries of impacting earnings).

The job market continues to weaken on the surface, but show some signs of resiliency beneath it that we will attempt to illuminate.

As we outlined in GMTFI Part 4, the distinctly dangerous territory we are in economically right now - the fact that we’ll continue getting more clarity as to whether the Fed will cut into a recession or cut and avoid a recession, necessitates an increased level of macro-awareness for all investors, regardless of focus.

We are keeping good on our word to continue with monthly macroeconomic memos to put the data in front of you, hopefully encouraging you to draw your own conclusions.

We’ve shared our thoughts on “Schrödinger’s Soft Landing” (explained in our last market outlook here), in which investors move rapidly between recession panic and economic reacceleration panic. We’ve seen that continue to play out since last month - most significantly in equities with SPX taking a 9% drawdown over 2 weeks that was rapidly reversed and now is fading again.

However, the conclusion that the US economy would end up in a recession as it did with previous hiking cycles is currently unsupported by data. Rather than heading into a recession, we believe that the US economy is well positioned to achieve a soft landing through “normalization” where the pace of economic activities smoothly returns to pre-COVID pace. 

The overall assessment we currently have is that the US economy has decidedly cooled over the past two years since the Fed’s hiking cycle began. Various metrics show that the broader economy has slowed from households to firms, from large corporations to small businesses.

And as we shared in GMTFI Part 4, this is the time of the cycle to remain paranoid. That has only become more true.

We’re currently seeing both of the conditions for that aforementioned paranoia play out amidst continually economically unnerving news flow. The two conditions are on the exact precipice.

The market is pricing in a 100% chance of a rate cut at the September meeting, with a 35-40% chance of 50bps (changing rapidly as I write this). Our recommendation to remain positioned for a steeper yield curve that would uninvert within months played out in violent fashion for 20bps of steepening, and currently sits at the 0bps level that delineates inverted/normal.

As originally outlined in April and re-stated in July, we believe that the odds of an inflation re-acceleration in the US remains low. Measured inflation should continue to decline towards 2% with the risk remaining and overshoot.

Without a doubt, the key risk remains slowing growth rather than inflation - hence why the Fed will begin cutting this month. The determination of “growth scare” remains in place, so let’s find out if we need to do Halloween early this year.

While our “Global Macro Trading for Idiots” series is free for all subscribers, these monthly macro updates will only be available to paid subscribers of CitriniResearch

To receive all our monthly macro updates and other paid content, please consider becoming a paid subscriber.