By Mike Dolan
LONDON, Feb 8 (Reuters) - Like mirages on the horizon,
recession forecasts seem to be appearing and disappearing with
great regularity - questioning any investment conviction, the
reliability of pandemic-distorted data and still-low volatility
gauges in financial markets.
In just six weeks of 2023, economic forecasters have
hurriedly revised away this year's long-assumed recessions in
euro zone and the United States - confounded as they were by a
mix of warm weather in Europe and some wild U.S. jobs market
revisions and statistical quirks that have dramatically reshaped
the interest rate outlook stateside.
Throw in China's unexpectedly swift removal of "zero COVID"
restrictions and already 2023's global picture looks radically
different than it did only in December - never mind the previous
January before the Ukraine invasion redrew inflation, interest
rate and investment maps for everyone last year.
Bearing in mind the United States, China and euro zone
together account for well over half the annual $101 trillion of
global output, that's some collective moving target.
Wall Street giant Goldman Sachs - often a market mover with
its big macro calls - is a good example. Last month it revised
away forecasts for a euro zone contraction this year and this
week cut its chances of a U.S. recession in 2023 to just
one-in-four from one-in-three previously.
Yet as recently as mid-December, forecasts from Bank of
America, Barclays and BNP Paribas were also plumping for a
full-year contraction of U.S. gross domestic product this year.
Last month's Bank of America survey of fund managers around
the world still had net 68% expecting recession this year.
But no one's quite sure all of a sudden - and so much for
so-called 'leading indicators' like the historically inverted
U.S. Treasury yield curve - traditionally a sure fire predictor
of downturns ahead.
Last Friday's red hot January employment report is forcing
hurried rethinks everywhere. Treasury Secretary Janet Yellen
stated baldly that the lowest jobless rate since 1969 is simply
inconsistent with recession this year and Federal Reserve
policymakers are already turning even more hawkish on the rate
outlook.
Rates markets reared up to price Fed rates back above 5% and
now expect them higher at yearend than they are today. Stocks
swooned again and currency strategists, such as the team at
Morgan Stanley, switched negative views on the U.S. dollar
worldwide to neutral all of a sudden.
If that wasn't enough whiplash, Fed Chair Jerome Powell
chimed with his colleagues on more that needs to be done to
tackle inflation - but also laced his comments with expectations
of a cooling jobs market and opined on the difficulties
predicting this cycle.
In other words, if your outlook hinges on getting a
recession call right or nailing the timing of peak interest
rates, be prepared to shift it now from week to week.
HOARDING AND FOMO
What's the big deal? As famed British economist John Maynard
Keynes is often quoted as saying: "When my information changes,
I alter my conclusions."
But the problem may indeed be the "information."
To be sure, the dance around the "R word" is a little
artificial. Rigid technical definitions involving consecutive
quarters of contraction may mean changes are only the difference
of a couple of tenths of GDP either way, the sort of margin
easily revised away down the pike anyway.
A bigger issue is whether monthly data can be trusted for
steer on the business cycle you're trying to second guess.
High-frequency economic numbers were bamboozled by the
pandemic's economic shutdowns and reboot worldwide - with
distortions still lingering on everything from supply chains to
labour force participation, savings, consumption and policy
rescues.
The energy shock around Ukraine merely compounded that by
amplifying an outsize inflationary twist and household squeeze
while jamming some supply chains even more.
Monthly economic updates now require significant health
warnings and assumptions of "normalisation" may have been
premature.
Although not inconsistent with other tight labour market
soundings, the U.S. January jobs report was riddled with
revisions, remodelling and seasonal adjustments.
While that may not change your view of employment today,
reasonable concern about labour hoarding and lags between
announcements of company layoffs and data surveys mean it's hard
to rely on it solely for a change of course the way many in
markets seem to have done since Friday.
But even doubts about the data can be read both ways.
Barclays' economists stressed there was evidence of job hoarding
in the fact that a huge downturn in the U.S. housing market last
year clearly hasn't shown up in construction layoffs. And if the
Fed had assumed those job cuts would come and the sector is
already bottoming, there may be more aggressive policy ahead.
But the numbers are so unclear, we're still in a guessing
game.
"It would be helpful to hear an assessment of what the Fed
actually thinks is happening given structural economic changes,
cyclical impulses and poorer quality data," lamented UBS
economist Paul Donovan ahead of Powell's speech on Tuesday.
Investors trying to bet on where all this pans out can't be
filled with confidence.
And yet market volatility gauges have stayed peculiarly
serene.
At just under 20, Wall Street's VIX is pretty much at
its average for the 33 years of existence. Bond market
volatility remains well above its 20-year mean - but it
has retreated sharply to two-thirds of last year's peaks. Even
currency volality is only marginally above average.
Are people just peering through the noisy macro and fearful
of missing out on the return to beaten down assets?
BNP Paribas Chief Economist William De Vijlder talks of the
risks of being "three times wrongfooted".
"One would expect that bond and equity markets would rally
when central banks signal that the tightening cycle is (almost)
over," he said. "But such positioning comes with the risk of
being wrongfooted by the data. What follows is huge volatility."
The opinions expressed here are those of the author, a
columnist for Reuters.
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Inverted Yield Curve US terminal rate Reuters poll on global growth outlook The jobs hole facing Biden and the Fed The jobs hole facing
Biden and the Fed A new golden age? ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(by Mike Dolan, Twitter: @reutersMikeD; Editing by Josie Kao)
Messaging: mike.dolan.reuters.com@thomsonreuters.net))
