And suddenly, strong growth and persistent inflation have investors contemplating a new course for the economy in the coming year — a “no landing” scenario.
Essentially, whether rapidly rising rates would quickly choke off economic growth and inflation, or gradually slow growth and price increases. In other words, would the Fed cause a recession, or just an economic slowdown?
The newly-coined “no landing” outcome instead considers a scenario in which inflation doesn’t actually cool while economic growth continues, even as interest rates remain elevated amid the Federal Reserve’s attempts to tamp prices down.
In the view of Apollo Global Management’s chief economist, Torsten Sløk, there are growing signs of the market pricing in this outcome.
“In other words, the market is saying that inflation will be significantly higher in a year’s time than the Fed’s 2% inflation target,” Sløk said in a recent note. “Put differently, instead of expecting a recession and lower inflation, short-term inflation expectations are rising and becoming unanchored.”
Sløk highlighted the recent pick-up in one-year inflation breakevens, which are approaching 3% after the aforementioned run of strong economic data in January, suggesting investors are coming around to the idea of inflation remaining higher for longer.
One-year breakeven inflation expectations are rising and approaching 3%, driven higher by the strong January employment report and yesterday’s CPI report. (Source: Torsten Slok, Apollo)
But according to at least one economist, this narrative investors appear to be betting on is “nonsensical.”
“Because we’re in this highly volatile environment, and because there is so much uncertainty, we’ve now seen a number of different ways to interpret or call what we’re seeing in the economy,” EY Parthenon chief economist Gregory Daco said in an interview.
A landing — however it may ultimately look — is going to happen eventually, in Daco’s view.
The economy operates in a cyclical pattern, growing until it reaches its peak and then contracting before hitting a trough and rebounding again into an expansion phase.
“No landing does not make any sense, because it essentially means the economy continues to expand, and it’s part of an ongoing business cycle and it’s not an event — it’s just ongoing growth,” he added. “Doesn’t that entail that the Fed will have to raise rates more, and doesn’t that increase the risk of a hard landing?”
Federal Reserve Chair Jerome Powell speaks at The Economic Club of Washington, D.C., U.S, February 7, 2023. REUTERS/Amanda Andrade-Rhoades
Sløk also indicated the no landing scenario would be likely to bring back the volatile market action we saw in 2022 because it reintroduces uncertainty about inflation and the Federal Reserve.
But the Federal Reserve hasn’t exactly given reason for uncertainty: officials have consistently asserted for months that rates are likely to rise above 5%.
Federal Reserve Powell has said as much himself: “There has been an expectation that [inflation] will go away quickly and painlessly; I don’t think it’s guaranteed that’s the base case,” he cautioned last Monday at the Economic Club of D.C. “It will take some time.”
And Sløk’s own expectations for how the Federal Reserve will handle this scenario align more with Daco’s thinking than current market pricing.
“The Fed will have to be more hawkish to ensure that inflation expectations do not drift too far away from the FOMC’s 2% inflation target,” Slok said in a note.
Which suggests officials may in fact need to raise rates higher, increasing the risk of a “hard landing” in the end.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
OTTAWA – The economy added 47,000 jobs in September, while the unemployment rate declined for the first time since January to 6.5 per cent, Statistics Canada reported on Friday.
The agency says youth and women aged 25 to 54 drove employment gains last month, while full-time employment saw its largest gain since May 2022.
The overall job gains followed four consecutive months of little change, the agency said.
The unemployment rate has been steadily climbing over the past year and a half, hitting 6.6 per cent in August.
Inflation that month was two per cent, the lowest level in more than three years as lower gas prices helped it hit the Bank of Canada’s inflation target.
The central bank has cut its key interest rate three times this year, and is widely expected to keep cutting as inflation has subsided and the broader trend points to a weakening in the labour market.
Despite the job gains in September, the employment rate was lower in the month, reflecting continued growth in Canada’s population.
Statistics Canada said since the employment rate saw its most recent peak at 62.4 per cent in January and February 2023, it’s been following a downward trend as population growth has outpaced employment growth.
On a year-over-year basis, employment was up by 1.5 per cent in September, while the population aged 15 and older in the Labour Force Survey grew 3.6 per cent.
The information, culture and recreation industry saw employment rise 2.6 per cent between August and September, after seven months of little change, Statistics Canada said, with the increase concentrated in Quebec.
The wholesale and retail trade industry saw its first increase since January at 0.8 per cent, while employment in professional, scientific and technical services was up 1.1 per cent.
Average hourly wages among employees rose 4.6 per cent year-over-year to $35.59, a slowdown from the five-per-cent increase in August.
The unemployment rate among Black and South Asian Canadians between 25 and 54 rose year-over-year in September and was significantly higher than the unemployment rate for people who were not racialized and not Indigenous.
Black Canadians in that age group saw their unemployment rate rise to 11 per cent last month while for South Asian Canadians it was 7.3 per cent. For non-racialized, non-Indigenous people, it rose to 4.4 per cent.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
