Ingrams July 2023

IN A NUTSHELL

by Ken Herman

Still No Recession in Sight

After 18 months of steady increases, where will the Fed go next with rates?

yields), has become even more inverted of late, registering at -106 basis points at last count. Even at that, many bond experts are saying that we are still in “lucky” territory, as this is not yet a sign of an imminent recession. In verted yield curves basically choke off the flow of credit in the economy as the classic “borrow short, lend long” mantra of U.S. banks will not work well if short-term funding costs become too expensive. People say inverted yield curves cause recessions due to this choke- hold on credit. This time around, though, due to the shortage of work ers in the economy, we are seeing remarkable resilience in economic performance, despite the fastest mon- etary tightening in Fed history. If this turns out to be a soft landing (due to the belated nature of the Fed

Recent data revealed an economy humming along at a modestly more respectable pace than figures had suggested just a few weeks ago. In its third estimate of GDP, the De partment of Commerce reported that U.S. economic growth expanded by 2.0 percent in the second quarter of 2023 compared to the previous year. This was revised from its previous estimate of 1.3 percent and exceeded economists’ expectations of 1.4 percent. The change reflected upward revisions to exports and consumer spending, offset by downward projections of non- residential fixed investment and government spending. This news pushed U.S. Treasury yields higher and further widen ed the inverted yield curve, while the stock market ended the quarter broadly higher. Where the bears can run into trouble is if the FOMO— Fear of Missing Out—psychology starts to take hold, chang ing the notion or fear that what once appeared to be a cer tain recession is not in the cards. There remains a mountain

of cash in money markets and short-term Treasuries that could start to find its way into equities if 5 percent yields do not satisfy investors. A Question of Pressure Even for one of the most unpopular rallies of the past several years, the pres sure to get into stocks can sometimes ex ceed the pressure to stay out. I would think that the phones at bearish equity desks at firms like Morgan Stanley and Bank of America were burning up, especially in recent days, as the quarter ended on a powerfully bullish note.

monetary tightening and the need to tighten more due to this belated ness), Powell will look very good again. We may not know if the econ- omic landing is soft for up to an other year. In 2006, the last rate hike was in the summer of that year, before the recession trig-

We are seeing remark able resilience in economic performance, despite the fastest monetary tightening in Fed history.

gered by the tightening cycle started in December 2007, an 18-month lag. Summers are not known for sharp rallies but more for consolidating mar- kets, even though there are no signs yet that this phase of the rally is over. This rally can keep going if we get lower inflation numbers and another Fed rate pause that turns into a stop. It would be wise for the Fed to pause again, but if Jerome Powell is not careful (with his Paul Volcker wanna be act), he may yet deliver the rate- hiking straw that breaks the camel’s back.

The thing about bearish predictions is that they always seem to come true at some point. But the timing of forecasting a meltdown may encompass many weeks, months, or even years down the road. There is still a great deal of cash sloshing around the globe. As of mid-June 14, the Fed’s assets stood at $8.4 trillion. And then there are the rest of the G-8 central banks and their bloated balance sheets. Money goes where it is best served. With so little action in the IPO space to soak up excess liquidity, there looks to be room for the market to continue its advance and lift most boats, especially for well-managed companies. The yield curve is as inverted as it gets. The yield curve, as measured by the two-year note and 10-year note (Treasury

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in

Glendora, Calif. E | Editorial@

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July 2023