Weekly Signal & Noise Filter
Back to L’Ancien Regime?
It’s almost as if Liberation Day was just a bad dream. If one accepts the backward-looking data of a strong core Q1 GDP and an above consensus April NFP print as prima facie evidence of said bad dream, then that is probably correct. What we learned Thursday and Friday is the following:
Confirmation of higher inflation due to revisions, as anticipated here. ✅
Stronger economic growth momentum in core GDP. ✅
A labor market that is still producing jobs comfortably above breakeven replacement rates to maintain U3. ✅
The bounce in equities and in yields in the rates complex further underscores this point, n’est-ce pas? After all, the above provides additional economic inoculation that lowers the speed of economic deterioration. At a minimum, the can of doom has been kicked.
However, the regime change bell cannot be unrung. A slowing economy was subjected to an exogenous shock that will still manifest itself in the coming months despite the evolving walk back of the tariff wars.
The question on everyone’s mind now is, recession or no recession?
The view of these pages has always been that avoiding a recession will be predicated on policy pivots by the White House and the Fed and doing so before the economic tariff flesh wound turned into a kill-shot. We got the White House pivot, for now. What now?
Near term inflation risks are to the downside, driven by lower portfolio management fees during March and April. Liberation Day tariff price shocks will likely start making their way through the economy by late spring and early summer.
The resulting inflation air pocket in the May and June PCE reports opens the window to the Fed’s pivot, if not with an actual rate cut then certainly with guidance towards one. The market has front run some of this with an easing of financial conditions.
The inflationary path is mostly non-controversial at this point, unlike in 2022. Thus, the recession call hinges on the evolution of the labor market.
Many observers will focus on labor market dynamics by watching weekly claims data and NFP prints. This is the noise and will likely not provide the early recession warning signals as they have in previous cycles.