Swissquote Bank: no landing is wishful thinking

Swissquote Bank: no landing is wishful thinking

Fed
Bubble dream droom

New set of economic data has crushed the optimistic rhetoric of soft landing.

‘The equity marathon that kept going on for questionable reasons since Tuesday ended in tears yesterday, with the arrival of a new set of economic data that crushed the optimistic rhetoric of soft landing’, Ipek Ozkardeskaya, Senior Analyst for Swissquote Bank, said today. 

She continued: ‘Released yesterday, the latest data showed that US producer price inflation rose more than expected on a monthly basis, both for headline and core data, and the core PPI eased less than expected – similar to what we saw in the CPI data, but the manufacturing index was a disaster with an unexpected drop from -8.9 to -24.3 – the expectation was -7.4. 

So that crushed the idea that the economy is strong, without however fueling the Federal Reserve (Fed) cut expectations, as the slowdown in inflation needs to be addressed for some more time.’ 

Mester and Bulllard for 50bp hike

‘And of course, comments from two Fed members were the last nails in the coffin yesterday.’  Ozkardeskaya went on. ‘Loretta Mester said that she would go for a 50bp hike if she had the right to vote in the latest FOMC meeting. And James Bullard said that he would back a 50bp hike in March, if he could vote this year. 

Happily, for the equity bulls, both Mester and Bullard don’t vote this year. But their non-voting status didn’t make their comments sound any less scary. As a result, the odds for a 50bp hike at the March FOMC meeting stand now around 18%, whereas this probability was just around 9% at the start of this week.’

No landing?

‘But will things get uglier,’ she said, ‘is yet to be seen, because we have seen evidence of a very strong optimism in the markets over the past few weeks, that no one, or no data has been able to hammer for good. The early-year optimism gave birth to the new concept of ‘no landing’.

No landing is the scenario where inflation remains high, but the economy remains strong as well. And unfortunately, it’s as realistic as a no landing scenario in a commercial plane. At some point, there will be no fuel, and the plane will have to land. If both the economy and inflation is strong, that means that the Fed could continue raising the rates until the economic strength gives in. And rising Fed rates will mathematically hit equity valuations. So that no landing scenario is nothing more than wishful thinking.’