The Week Ahead – Renaissance or 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 everyone had a nice holiday weekend. We celebrated Easter with my parents who brought their dog to meet our four-month-old puppy. It was a bit touch and go at first, but once they warmed up to each other, they ran around and played non-stop. As I am writing this, our little pup is passed-out cold from exhaustion.

It was another rough week for markets, but another strong week of economic data. Equity prices were down, while bond yields and the price of oil were up. We saw the 30-year mortgage go over 5% for the first time in several years, which is not great for housing. In addition, oil going higher exacerbates the inflation story. On the side of strength, coming off the Omicron soft-patch, retail sales increased 1.2% in March, and Industrial Production increased at a blistering 4.2%! Continuing unemployment claims made another all-time low. Federal tax receipts surged 27% on a year-over-year basis. Bank loans continued to grow by $41 billion this week, and have continued to accelerate. When bank loans increase, it is a sign of positive economic momentum.

Most economic forecasters view the economy as doing fine now. Our view is that a recession is unlikely unless the yield curve inverts. Once a sustained inversion (short-term yields above long-term yields) occurs, then it generally takes about a year for economic growth to become negative. Expect the Federal Reserve (Fed) to slash interest rates if the economy flags recession. 

While the Federal Reserve entering a tightening cycle does not make a recession inevitable, a financial crisis is probably looming as the era of cheap money comes to a close. Here are some potential challenges:

1. Russia has defaulted on its foreign debt, says S&P.

2. Sri Lanka default looms as debt payments halted. 

3. Peru and Pakistan have tipped into outright crises.

4. Cryptocurrency slump.

Housing will be the key theme this week for economic releases. Showing signs of coming off the boil, we estimate existing house sales fell to 5.6 million last month. The Leading Economic Indicators (LEI) Index, which has been a reliable metric for near-term economic growth, should edge up slightly in March, and suggests above-trend economic growth.

Data deck for April 18– April 22: