Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
US leading indicators are flashing red alert
Peter Garnry
Chief Investment Strategist
Summary: US equities rose yesterday to the highest close since 9 September despite US leading indicators for October delivered the biggest m/m decline since March 2009, if we exclude the pandemic, suggesting the US economy is deteriorating and getting closer to a recession. This is adding more evidence to our prediction that corporate earnings will fall next year making 2023 another troublesome year for equities and investors.
An echo from the past
US leading indicators for October came out yesterday at -0.8% m/m which is worst m/m change, excluding the pandemic, since March 2009 when the global economy was stuck in a global credit and banking crisis. Stretching out the perspective and smoothing the indicators, the 6-month average sits at the same level as in December 2007 when the US economy officially entered a recession that eventually continued and amplified into the Great Financial Crisis. As we recently wrote in one of our equity notes, the Eurocoin Growth Indicator (tracking real time GDP in the Eurozone) is already indicating that the European economy is in a recession, and now the US leading indicators are suggesting the US economy is close to being in a recession.
The difficulty in these type of analyses is that recession dynamics change from time to time because the global economy is a complex system. This means that leading indicators fitting prior recessions well will intrinsically have difficulties getting the next recession right. In any case, we can say the economies in the US and Europe are slowing down rapidly due to the interest rate shock, and unless China pulls out a white rabbit successfully kickstarting their economy it will be difficult to avoid a recession. The next question is then what type of recession we get. Is it going to be shallow and short-lived, or is it going to be deeper and longer? Regardless of the severity of the recession the declining leading indicators are adding evidence to our prediction that corporate earnings will fall next year making 2023 another troublesome year for equities and investors.
Have the bears lost interest?
S&P 500 futures rallied 1.3% yesterday on no significant new news and the theme basket gainers were predominantly the best performing baskets over the past year if we exclude semiconductors. In other words, it was a momentum driven session yesterday and took the S&P 500 futures to the highest level since 9 September. As we have discussed in our Saxo Market Call podcast the bears are sitting on solid gains for the year if they have been long energy, short bonds, and equities, and as such that there is little incentive for the bears to take a lot of risk in last five weeks of the year. This could lean the sentiment in favour of the bulls and could push equities higher despite the economic picture looks increasingly more negative as discussed above.
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