This was the early tell in the recession reversal trade

Economic forecasting isn’t easy.

At various points over the last two years it looked like the US was slowing down dramatically. At the start of 2023, a looming recession call was the consensus forecast. This year, as some economic indicators deteriorated, those calls returned.

It was understandable — high interest rates hurt the economy.

In some ways, it was a recession. The manufacturing sector has struggled for many months. Anything housing-related is undoubtedly in a recession. Dollar stores have been wilting under the pain and the lowest quintile is very likely in a recession.

Against that, the power of 30-year fixed rates continues to lift to spending. The US is also benefiting from massive amounts of fiscal stimulus at 7% of GDP and stock markets are ripping on an AI investment boom. I fear what will happen when the fiscal tap runs dry. The 30-year fixed is also fading with 16% of all mortgages now at a rate greater than 6%, according to Housingwire.

For me, the turning point in the outlook (and it’s easier in hindsight) was the Wal-Mart earnings report. It’s something I wrote about extensively as it’s a company that has better data than anyone.

“So far, we aren’t experiencing a weaker consumer overall,” said CEO Doug McMillon.

The Fed is right to be dovish because inflation is heading lower and 5% rates are unnecessary now but Powell looks like he has a great shot to nail a soft landing. I don’t think it’s time to worry about a resurgence in inflation just yet but that might depend on how hard China stimulates.

This article was written by Adam Button at www.forexlive.com.