The Week Ahead – Anatomy of a Recession

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Hope all the dads out there had a wonderful Father’s Day. Becoming a father 12 years ago has been the most rewarding experience of my life. I was fortunate enough to be able to spend the day with my father on Sunday. As we were chatting, he leans in and says “So, we’re in a recession, right?” This, combined with a recent poll showing that most people now believe the U.S. economy is currently in, or heading into recession made it clear the specter of a shrinking economic backdrop has firmly entered the current zeitgeist.

After the hot inflation print came in last week, the Federal Reserve (Fed) increased interest rates by 75 basis points (0.75%), which is the largest single hike since 1994. Since the Fed cannot solve supply-side issues, it must use the rather blunt tool of suppressing demand by reducing the money supply. Of course, the more the Fed raises interest rates, the higher the probability of economic recession, which is putting pressure on risk assets. Indeed, every survey out last week showed recession odds of at least 60%.

While economic data is no doubt in a declining trend, we are still benefiting from the rapid V-shaped recovery coming out of the pandemic. Further, the yield curve, which has a perfect record of calling recessions remains positive indicating no recession. However, the econometric model we use to help forecast economic growth has slipped to just +1% - still positive, but only slightly.

Interestingly, China’s economy is rebounding on the back of significant government stimulus. This should help alleviate some of the supply chain issues that continue to plague the global marketplace – one of the major sources of inflation.

It is difficult to foresee the U.S. economy going into recession in the near term with the unemployment rate at just 3.6%, and the labor market continuing to produce jobs. Further, the consumer remains healthy with lots of pent-up savings, which is allowing them to keep spending despite reporting record low sentiment.

We will get more clues as to where the economy is headed this week. Investors will be particularly focused on Fed Chair Jerome Powell’s testimony on Tuesday. We will also get more information on the labor market and inflation expectations – should be an interesting week.

Data deck for June 20 - June 24: