February saw investors conjure up a new idea as they continued struggle to come to grips with competing economic scenarios: the “no landing.”
Under a no landing – as opposed to a soft or hard landing – the economy ignores the Federal Reserve and keeps on growing, while inflation eventually moderates (or not).
This is interesting, but it seems unlikely. The Fed has been clear in its determination to do whatever is necessary to get inflation back down to its 2.0% target. One major issue from the central bank’s point of view has been the refusal of the jobs market to cooperate. This obdurance was on view again early in the month when the Labor Department reported blowout employment numbers for January – 517,000 new jobs and an unemployment rate of 3.4%, a 53-year low. In other signs of persistent economic strength, retail sales rose 3.0% in January (Wall Street Journal, Feb. 15), personal income was up 1.4%, topping estimates of 1.2%, and the personal savings rate came in at 4.7% (CNBC, Feb. 24).
But that robustness was not generally welcomed by the Fed, and it was that view that most impacted markets. On the day the January jobs numbers came out the S&P 500 fell -1.0%, the Dow gave back -0.4%, and the Nasdaq dropped -1.6% (Wall Street Journal, Feb. 3). By mid-month the S&P 500 was posting the worst week of the year and investors were pulling a net $31 billion from US equity mutual funds and ETFs, according to Refinitiv Lipper (Wall Street Journal, Feb. 12).
Higher for longer was clearly not the favored outcome.
But inflation was in fact continuing to slow, if fitfully. The Consumer Price Index (CPI) rose 6.4% in January, down from 6.5% the month before. This was the seventh straight month of declines (Wall Street Journal, Feb. 14) and left the CPI well below its peak of 9.1% last June, the highest number since 1981 (Wall Street Journal, Feb. 14).
But, as Fed Chair Powell recognized, the decline was unlikely to proceed in a straight line. Speaking to the Economic Club of Washington he acknowledged that while the rate of inflation was indeed falling, “it is likely to take quite a bit of time,” and, “it’s probably going to be bumpy.”
This “bumpiness” was confirmed later in the month by the release of Personal Consumption Expenditures (PCE) data. Excluding food and energy, core PCE came in at 4.7% year over year, against expectations for a 4.4% increase (CNBC, Feb. 24). Markets again reacted negatively. On the day, the S&P 500 fell -1.0%, the Nasdaq was off -1.7%, and the Dow -1.54% (CNBC, Feb 25).
In the end, nothing much worked in February. As a Bloomberg story noted, “the least-bad return among major US assets was a decline of 1.4% through Monday (Feb. 27) from high-yield bonds.” That was followed by Treasuries and the S&P 500, both with declines of -2.5%, a -3.2% fall in investment grade bonds, and a -5% drop in commodities (Bloomberg, Feb. 28).
Bond yields told much of the story. For the period February 2 to March 2, the yield on the 10-year treasury rose from about 3.38% to 4.07% (Yahoo Finance, March 2). The dollar strengthened, with the Wall Street Dollar Index climbing from 101.75 on February 2 to about 104.97 on March 2 (Wall Street Journal, March 2). Emerging markets (EM) were dinged. As of mid-month, EM bonds were off -1.3% and EM stocks had fallen -1.6% (Wall Street Journal, Feb. 15).
One winner for the month was volatility. The Wall Street Journal reported a big increase in the purchase of call options on the VIX, the CBOE Volatility Index (Wall Street Journal, Feb. 26). The VIX itself rose to as high as 22.87 during the month from a low of 17.87 on February 1 (VIX Index). In our view this reflected continued uncertainty over inflation, and the so-called “end point” for the Fed funds rate, which is now above 5.0% and trending higher (Reuters, March 1).
In spite of this, there were reasons to think that the pace of inflation would continue to slow. Apartment rents fell across the country as supply began to catch up with demand (Wall Street Journal, Feb. 27). Supply chain issues saw some improvement (Wall Street Journal, Feb. 21). Finally, there was some evidence that the job market was cooling. Late last year and early this, two major online job recruiters reported a decline in postings bigger than that indicated by Labor Department (Wall Street Journal, March 1).
Milton Friedman famously posited that monetary policy works with “long and variable lags” in relation to its implementation and impact on financial conditions. Perhaps the latest economic releases are signs that the delayed nature of monetary policy is beginning to filter through the economy.