I started out the year warning that the US consumer has more left in the tank than believed. The market is beginning to adopt that view, with Bank of America today changing its recession call.
"We push back the timing of our outlook for a mild recession in the US economy by about one quarter given durability in consumer spending on account of strong labor markets, excess saving, declining energy prices, and easier financial conditions," economist at Bank of America wrote. "That said, we think the headwinds will lead consumers to reduce spending and push the saving rate higher as the year progresses."
Combined that with today's comments from St Louis Fed President James Bullard. Admittedly, Bullard is on the periphery of the Fed but I do believe he captures some of thinking. He said that the Fed wants to err on the tighter side to allow disinflationary process to take hold.
What I think is unfolding -- and perhaps the market is getting a sense of -- is that excess savings are slowing being drawn down by high rates but the Fed is going to keep rates high with some risks of going even higher. That risks creating a bit of a Wile E. Coyote moment as the Fed squeezes hard into a slowing economy and then the consumer fiscal cushion runs out.
At the same time, Mike Wilson at Morgan Stanley made a good point today arguing that corporate margins are being artificially inflated by selling old inventory that was cheap to acquire and today's higher prices. The next part of the cycle will feature rising COGS and flat prices. He argued that it's poorly understood.
All of that is a reminder of the risks even in a soft landing scenario. At the same time, given the sharp declines in ISM services, the Empire Fed and today's retail sales report, you have to wonder if a hard landing with the same blase Fed is a real risk.
The S&P 500 has turned a solid gains into a 50 point (or 1.2%) decline.