The Disappearing Dream? A Closer Look at “No Landing” and Why It May Be Fading Away Fast
There’s been a lot of chatter around the idea of a “no-landing” scenario with the economy coming out of inflation and fighting off a recession.
Prior to the momentum behind “no landing” picking up last month, everybody was all about the soft landing. In that scenario, they could creep up to that line of tightening the monetary policy without causing a recession.
Unlike the hard or soft landing, which both see inflation coming down, the “no landing” would involve inflation remaining high, with growth remaining strong.
I mean, just take a look at this chart showing mentions of “no landing” compared to “soft landing” in the past six months.
As you can see, there’s a new sheriff in town. Unfortunately, the idea of “no landing” could be extremely bad for the consumer.
Really, as investors, a hard landing would likely have been an amazing moment for all of us because it would have been a clear-cut indicator that the job is done.
With a soft landing, it waters down the signal but still results in market capitulation.
So, did the Fed actually achieve the impossible and thread the needle and avoid a full-on recession, or is this just our regular dose of hopium to make us feel better about what’s going on in our economy?
Well, the bond traders – the smartest traders in the market – are telling us that the idea of “no landing” is diminishing fast.
Inflation is continuing to move higher, and for us to achieve the “no landing” that everybody thinks the Fed could pull off, inflation would have to level off at some point.
That means we should see bond yield start to level off as well, and just a quick look at the 10-Year Treasury Note Yield Index (TNX) will show that is likely not the case:
Everything is starting to march higher in the bond market because the best-case scenario for the Fed is that rates will continue higher toward that 5.5% range as they continue to battle inflation.
the last time we saw TNX above 4%, was back in October. During this time we were expecting the Fed to move rates to a point closing in on 4.75% …
Well, right now the Fed is tightening the spread on expectations of where they want rate hikes to go, and it’s much higher than what expectations were back in October. As of now, they are looking toward a target of 5.4%.
And the same is happening in the 2-year treasury rates.
Investors’ expectation of inflation saw a sharp move higher, with the 2-year breakeven up from 2.33% to 3.18% over the month of February.
So both short-term and long-term bond traders are looking for rates to go higher.
The fact of the matter is the market is waking up and realizing that rates are going to go higher – and likely stay higher.
So, what you need to watch right now is the CME FedWatch Tool.
It’s going to give you live data on not just what people think the Fed is going to do, but also where they’re putting their money on those Fed expectations (Fed-pectations? I’ll workshop it).
The more the market’s expectations rise toward a larger rate hike – we’re talking 50 basis points – the more we are going to see it play out to the downside on the S&P 500, and the companies that are lumped into it are going to start their move lower.
And once we see that market capitulation that we have been longing for in this disconnected market, we will know that we have truly put in a market bottom.
But the market needs to stop avoiding the inevitable, the buy-the-dippers need to stop trying to hold the market up, and everybody needs to come back to reality…
And luckily, that is exactly what we are seeing take place in the market right now.
March 02 2023