Hard landing canceled, looks like the soft landing is back?
After a disappointing jobs report that coincided with a carry trade unwind of the yen caused a sell-off in equities, investors cheered a headline CPI and PPI that beat expectations by 0.1%. This led some economists to point to a core PCE deflator figure below the Fed’s 2% target as evidence that inflation has been vanquished. Then, for stock investors, the retail sales data arrived to inject optimism back into the market. It appeared that the economy was still strong and the soft landing was back on the table with the possibility of rate cuts to boot.
All the data points can be tough (even for the experts) to interpret – especially when you consider conflating factor that may have skewed the numbers. DId weather impact the jobs report, and did the timing of Amazon Prime day skew retail sales? So is the soft landing now to be expected or is a hard landing still on the table?
What the Finance Gurus are saying:
Depending on which guru you ask, there is still a 30%-50% chance of a hard landing, and none of the Guru panel has declared a soft landing close to a certainty. All of the gurus who weighed in thought it was still not clear where the economy was headed, and some even pointed to the possibility of a reaccelerating of inflation. Most were cautions, saying that risks to the economic outlook remain.
- Rebecca Patterson, the former CIO of Bridgewater, warned there is still only a 50% chance of a soft landing. She also warned that it can take a long time for rate cuts to feed through the economy, meaning that if the economy does slow, rate cuts won’t immediately turn things around.
- Mohamed El-Erian has been saying for some time that he believes the labor market is weakening, and that the fed may be behind the curve. As he put it, “inflation risk is not much lower than the unemployment risk.” He believes that there is a risk of a hard landing if the fed keeps rates high for too long.
- Larry Summers struck a more balanced tone, saying “the fed should make clear that they are watching the data and that they should balance the concern of unemployment with the concern of higher inflation.” Summers believes there is bot a risk unemployment turns up and that inflation remains.
- Nouriel Roubini, on the other hand, earlier in the month said he believes the economy may be stronger than people think. Roubini said markets are getting nervous about recessions, but markets have “predicted 10 of the last 3 recessions.” He continued that there is evidence of some showdown, but not of a recession. If anything, there are some elements of strength in the economy.
So What’s Next?
Gurus have been wrong before. Earlier in the year, hedge fund billionaire Bill Ackman said that he believed the economy was slowing and that the fed needed to cut rates. If that was true in January, the fed is way behind the curve now. But going by the Gurus comments, now is not the time to bet big on a soft landing, significant chances of a hard landing remain. Some gurus even hinted at the possible resurgence of inflation, hinting a the possibility that rates are not high enough.
Unfortunately, according to the gurus, it seems that the future path of the economy has not yet become clear, and a wide variety of economic outcomes are still real possibilities. Investors should remain cautions – as the last few weeks have shown markets can change fast.
