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.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
