The time for tip-toeing around the US economic slow-down is long gone.
US Manufacturing PMI fell deeper into contraction to 47.1 in April.
The truly shocking reality is that US Manufacturing PMI is now at levels last seen at the dark depths of actual Covid-Lockdowns in the US. It simply does not get any worse than this.
Yet, the market either just wants to look the other way, or see such economic demise as twistedly bullish because it puts dovish pressure on the Federal Reserve.
There is no doubt the market has been celebrating the idea that this week could see the last Fed rate hike, and even the absolute peak in the Fed Funds Rate this cycle.
Many economists, including myself, have warned against thinking this is assuredly the case. There simply is too much services sector and wages pressure inflation still impacting the US economy to be sure that the inflation wildcat is in any way back in its cage.
During the great period of accelerating globalisation price pressures were contained for the first time in history by truly globally competitive price pressures.
All of that containment, where inflation became nothing more than a house kitten, was washed away by the great covid-supply chain disruption. Which has been quickly followed up with further supply chain disruption via war in Ukraine, sanctions against Russia, and China elongating its Covid lockdown response.
What we are left with is an increasing trend of geo-political counter globalisation moves and tensions. More sanctions on a monthly basis against Russia and China.
Regardless of whether you agree or disagree, most certainly these developments further disrupt global trade patterns.
The world has not faced such extreme geo-political risks since the worst days of the Cold War. At any time, sudden spikes in energy, commodity or food prices can occur.
Hopefully this will not be the case, but even without such ramifications, inflation remains at extreme levels and has shown a very real ability to re-accelerate at a moment’s notice.
The prospect for any rate cuts by the Federal Reserve remain therefore somewhat limited. What will the equity market do when it is realised rates are not going down, or heaven forbid, there is a further need to raise rates beyond this week’s supposed ‘last hike’?
The real crux of the matter is that the US economy is in dire straits with a largely paralysed potential policy response just as it is becoming clear that even with maintained and extended fiscal largesse, the economy is still stalling.
As we approach the ‘last great hike’, the market has already priced such an event with great enthusiasm. Leaving the price action structure badly exposed to a major ‘buy the rumour/sell the fact’ event.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
