News : Betting on a soft landing

Friday, March 25, 2022

Betting on a soft landing

Mar 25, 2022

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QUICK FIX

A rate hike rally for stocks? — Stocks have been doing better lately after an ugly start to 2022. The S&P 500 is up 6 percent since Wednesday of last week, when the Federal Reserve raised interest rates and signaled several more hikes coming this year. The upshot: Investors are anxious, but they're optimistic that the economy is strong enough to withstand what's ahead.

Bond yields have risen, though the spread between the 10-year Treasury and the two-year has narrowed, signaling that those investors are more nervous than their counterparts in equities (as one might expect). But that dynamic for now mostly seems to be signaling expectations for slower growth — not an outright recession.

One of the data points giving Wall Street cause for optimism: a surging job market. The economy created 678,000 new jobs last month. On top of that, jobless claims last week fell to their lowest since September 1969 ( cue Bryan Adams), a further sign of just how strong the labor environment is right now.

"It seems pretty silly to worry about a recession when jobless claims are at 53-year lows," said Guy LeBas, chief fixed income strategist at financial firm Janney Montgomery Scott.

Still, Liz Ann Sonders, chief investment strategist at Charles Schwab, said she's not overly cheered by the recent rally in stocks. Some of the money flowing into the market likely reflects the fact that bond investors have gotten hammered this year, she said, and warned against drawing any long-term conclusions.

But the interplay is worth watching. In the decades following World War II, "the correlation was almost the entire time negative: If bond yields were going down, stock prices would be going up," Sonders said. "That was an inflationary backdrop." But following the 1970s, bond yields and stocks would move up together, generally signaling positive sentiment rather than inflationary fears. Which relationship prevails could provide some useful signals now.

"The Fed admittedly is way behind the curve. Inflation is extraordinarily high," Sonders said. "But in the current environment, if we can keep growth hanging in there, the labor market strong, productivity strong, maybe the bet is, OK, we can handle tighter monetary policy."

So, what would a so-called soft landing look like? Most likely, it would mean price spikes cool significantly on their own with some help from the Fed, though inflation still stays notably above the central bank's 2 percent target. Growth, meanwhile, would slow but not enough to put the economy in danger of contracting.

"The best case for the Fed is if they get inflation down to 2.8 percent, and they just stick a flag in it, and they declare victory," said Mark Spindel, chief investment officer at Potomac River Capital.

He said markets have probably taken reassurance that the Fed is finally withdrawing its support, showing they're not "asleep at the switch." That's a shift from recent years, when investors often welcomed disappointing news that they thought would lead the Fed to be gentler.

Not everyone is pleased to see the central bank move. "The Fed is adding confusion to the fire, and we already have enough confusion," said William Spriggs, a professor at Howard University and chief economist at the AFL-CIO. "They are contributing to people believing, 'Oh, the economy is overheating.'"

His message: It's supply problems, and there's not much the Fed can do about that. "American interest rates have nothing to do with what Putin is gonna do, and it's not going to produce a single chip for an auto factory."

HAPPY FRIDAY — We've survived another week. Kate Davidson will be back in your inbox on Monday! Send any tips to her at kdavidson@politico.com or @KateDavidson, and to Aubree Eliza Weaver at aweaver@politico.com or @AubreeEWeaver. And you can always reach me at vguida@politico.com.

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Driving the day

NATO VOWS TO BOOST AID TO UKRAINE; ZELENSKYY WARNS IT FALLS SHORT — From our colleagues David M. Herszenhorn and Lili Bayer in Europe: "NATO leaders pledged Thursday to boost aid to Ukraine in its battle against Russia's invasion but Ukrainian President Volodymyr Zelenskyy accused them of cowering from the threat of confrontation with Vladimir Putin, and of naivete in thinking that Russia's aggression would not continue against their own countries.

"'We are determined to do all we can to support Ukraine,' NATO Secretary-General Jens Stoltenberg declared following a summit of the alliance's leaders in Brussels, which Zelenskyy addressed via video link. But in response to questions about Zelenskyy's specific pleas for help — including the closing of Ukrainian airspace to Russian military aircraft, and donations of tanks, fighter jets and other weapons — Stoltenberg made clear that 'all we can' did not include much of what the Ukrainian president had requested."

BIDEN EXPLORES RARELY USED SANCTIONS WEAPON — WaPo's Jeff Stein and Jeanne Whalen: "Senior Biden officials are exploring a dramatic escalation of the administration's sanctions on Russia as the death toll mounts from the war in Ukraine and the impact of existing sanctions on Russia's economy remains unclear.

"To date, the sanctions imposed by the United States have prevented American banks and firms from transacting with Russian banks, oligarchs, defense firms and other parts of the Russian economy. But now White House officials are preparing rarely used measures that would also punish third parties in other countries for interacting with parts of the Russian economy that have been sanctioned by the United States, according to four people aware of administration conversations who spoke on the condition of anonymity to describe the private talks."

WATERS PRESSES FINANCIAL TRADE GROUPS FOR RUSSIA INFO — House Financial Services Chair Maxine Waters (D-Calif.) on Thursday pressed more than 30 financial industry lobbying groups for information about which of their companies have exited operations in Russia and which are still engaged there. "I have been heartened by how many companies in the financial services industry and in corporate America have taken actions above and beyond those explicitly called for by U.S. sanctions," she wrote in a letter. "Even though multiple companies have voluntarily divested from Russia, the Committee currently lacks a clear picture of the extent of these divestments."

GILLIBRAND, LUMMIS PLAN NEW CRYPTO REGULATORY FRAMEWORK — Our Sam Sutton and Katy O'Donnell: "Sens. Kirsten Gillibrand and Cynthia Lummis are working together on legislation that could give the crypto industry something it has always craved — regulatory clarity . The lawmakers are putting together a 'broad-based regulatory framework for how this industry should potentially be regulated in the future,' Gillibrand announced at a POLITICO Live event on Thursday afternoon.

"'The work we're doing is going to be a very complex and intensive review of the different aspects of this industry — some parts will be regulated by the [Commodity Futures Trading Commission], some parts will be regulated under the [Securities and Exchange Commission],' Gillibrand said."

THE NEW NORMAL? — NYT's Jeanna Smialek: "The pandemic, and now the war in Ukraine, have altered how America's economy functions. While economists have spent months waiting for conditions to return to normal, they are beginning to wonder what 'normal' will mean. Some of the changes are noticeable in everyday life: Work from home is more popular, burrito bowls and road trips cost more, and buying a car or a couch made overseas is harder."

"But those are all symptoms of broader changes sweeping the economy — ones that could be a big deal for consumers, businesses and policymakers alike if they linger. Consumer demand has been hot for months now, workers are desperately wanted, wages are climbing at a rapid clip, and prices are rising at the fastest pace in four decades as vigorous buying clashes with roiled supply chains. Interest rates are expected to rise higher than they ever did in the 2010s as the Federal Reserve tries to rein in inflation."

Fly Around

THE GREAT RESIGNATION IS BEGINNING TO REVERSE COURSE — Barron's' Megan Cassella: "When the pandemic first hit, Celeste Lyons quit her job at a law firm in Connecticut and started to hunker down at home, living off retirement savings and an inheritance from her parents as she tried to avoid getting sick. She wanted to work again eventually, but nearly two years went by before Lyons, 63, started a new gig as a real estate analyst—a position that allows her to work from home when Covid cases spike.

"'I got tired of spending my retirement money. I thought, "I've got to pad my account," ' Lyons says of her decision to return to work. Plus, she adds, during all that time at home, 'I just got bored out of my skull.'"

MORTGAGE RATES HIT THREE-YEAR HIGH — WSJ's Ben Eisen: "Home buyers and owners are facing the highest mortgage interest rates in three years, a rapid increase that threatens to cool down the red-hot housing market.

"The average 30-year fixed mortgage rate rose to 4.42% this week, up more than a quarter percentage point from a week ago and more than a full point from the start of the year, according to mortgage company Freddie Mac. Other firms that track mortgage costs pegged the average rate even higher."

BIDEN AIDE BLASTS RUSSIA's 'POTEMKIN' STOCK MARKET OPENING — Our Nahal Toosi: A Biden administration official key to crafting sanctions on Russia blasted the Kremlin on Thursday as it partially reopened the Moscow stock exchange following a month's hiatus.

"Daleep Singh, deputy national security adviser for international economics, called the move 'a charade' and 'a Potemkin market opening.' 'After keeping its markets closed for nearly a month, Russia announced it will only allow 15% of listed shares to trade, foreigners are prohibited from selling their shares, and short selling in general has been banned,' Singh said in a statement released by the White House."

DANGERS OF SHADOW BANKING — New report from Better Markets: "Not only have the issues in the nonbank financial sector proved to cause or exacerbate financial market turmoil in times of stress, but they have also made the too-big-to-fail issue in the financial sector harder to solve."

FINK: POST-COLD WAR GLOBALIZATION HAS ENDED — From your guest host: "BlackRock CEO Larry Fink on Thursday said disruptions from Russian sanctions and the war in Ukraine are fueling moves by governments and firms around the world to reconsider globalization and look inward.

"'The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,' Fink, who heads the world's largest asset management company, wrote in his annual letter to shareholders . The war "has upended the world order that had been in place since the end of the Cold War, more than 30 years ago."

GOLDMAN PUSHES DIRECTORS FOR MORE CLIMATE DATA — Reuters' Ross Kerber: "Goldman Sachs' big asset-management arm will take a harder line in voting on directors at companies that do not disclose enough about their greenhouse gas emissions, an executive said on Thursday, adding to the pressure on business leaders to provide more climate-impact data.

"Starting with annual meetings to be held this spring at companies worldwide, Goldman's $2.5 trillion asset management division will cast proxy votes against directors, often on the audit committee, who have oversight of emissions reporting and are not disclosing enough."

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