That Sinking Feeling: Is the U.S. Entering Recession?

Is the U.S. in Recession? Or headed there? On Wednesday, the U.S. Dollar Index hit its lowest level since November. Is that a function of currency traders preparing for the easing of monetary policy by the U.S. central bank, due to a weakening economy? It could also have something to do with the global bond market selloff and the rising value of the euro. The euro is the most heavily weighted foreign reserve currency in the basket that the U.S. Dollar Index is measured against. U.S. Treasury debt securities had been in demand.

Is that a sign that bond traders expect the Fed to ease monetary policy? It certainly could be. The yield on the benchmark U.S. Ten Year Note dropped all the way to 4.12% on Tuesday. Then again, U.S. sovereign debt has, this week, joined the selloff that is infecting markets for sovereign debt globally. On Wednesday, that yield popped 4 basis points to land at 4.28%. As Wednesday night melts into Thursday morning, I have seen U.S. Ten-Year paper pay as much as 4.328%.

We all know that domestic macroeconomic data has been weakening. Just this week, the February release of the ISM Manufacturing Purchasing Managers' Index survey showed a sharp drop in new orders, and still rapidly rising producer-level inflation. We know that construction spending sort of made like a pea rolling off of a table in January. On Wednesday, the ADP Employment Report of private sector job creation for February printed at just 77,000 new hires. This was down from 186,000 in January and well below the 145,000 or so that economists had projected. That really puts Friday's Bureau of Labor Statistics numbers under the microscope, despite the Bureau of Labor Statistics' poor reputation for data collection and accurate dissemination of information.

Last week, January New Home Sales, January Core Durable Goods Orders, January Pending Home Sales, January Personal Spending and the January Goods Trade Balance all disappointed. All of this is what threw the Atlanta Fed's GDPNow model for the first quarter into a tizzy. The model quickly moved from showing growth of 2.3% (q/q, SAAR) to a contraction of 2.8%. I don't think I have ever seen this model, outside of the onset of the pandemic, deteriorate this rapidly.

The Beige Book

On Wednesday afternoon, the Federal Reserve released the latest edition of its Beige Book. For the new kids, the Beige Book is a Federal Reserve publication released eight times per year ahead of Federal Open Market Committee policy meetings that contains anecdotal evidence of economic conditions from across the twelve regional Fed districts. One of the twelve regional banks acts as the aggregator of these anecdotes on a rotational basis.

The next FOMC policy meeting will culminate on March 19, the aggregator for Wednesday's release was the Minneapolis Fed and the anecdotes were collected by Feb. 24. Overall, tariffs were mentioned 49 times within the report and are certainly at least in the book, an inflationary concern. That could be one reason behind the spike in yields across the slope of the Treasury's curve this week. Here's a taste of some of the info released on Wednesday:

• Overall Economy: "Overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions."

• Labor Markets: " Employment nudged slightly higher on balance, with four Districts reporting a slight increase, seven reporting no change, and one reporting a slight decline."

• Prices: " Prices increased moderately in most Districts, but several Districts reported an uptick in the pace of increase relative to the previous reporting period."

• Economic activity increased in the Boston, Richmond, Atlanta, and Dallas regions.

• Economic activity remained close to unchanged in the New York, Cleveland, Chicago, St. Louis, Minneapolis, and Kansas City regions.

• Economic activity contracted: in the Philadelphia, and San Francisco (which covers the entire west coast) regions.

Bright Spot

Anyone else take a good look at the February release of the ISM Services or 'Non-Manufacturing" PMI, which covers about three quarters of the U.S. economy? The headline number printed at 53.5, an eighth straight month of expansion. Within this release, New Orders landed at 52.2, which was an acceleration from January and also an eight consecutive month of expansion. Employment printed on the "plus" side for a fifth consecutive month. Was there any bad news within?

Sure. Prices or inflation hit the tape in a state of expansion for a 93rd consecutive month and seem to be accelerating. That means that service sector prices have been rising steadily since early in President Trump's first term and still haven't paused. That's incredible. Overall, this report does not read like a report covering most of an economy that is mired in or headed into a prolonged state of contraction.

Does that mean the Atlanta Fed's model is wrong? Well, they are the downside outlier, but many private sector models are being revised lower. The fact is that even though the growth created by federal and local deficit spending may or may not be considered artificial or manipulated by many economists, myself among them, the removal of this spending will undoubtedly show up statistically.

Additionally, as government payrolls are pared down, though it may be the right thing to do for U.S. taxpayers on the whole, the unemployment and underemployment rates will rise as will the misery index on an individual level. The increased supply in available labor will pressure age growth, even for those working in the private sector and this will work its way into consumer expenditures. In short? My opinion is that the US economy is decelerating and will come very close to outright contraction in the first half of 2025.

My track record on recognizing oncoming economic contractions was solid until the Biden administration. The U.S. never went into sustained contraction during that period as measured by gross domestic product but did come very close as measured by gross domestic income. The Treasury yield curve projected a recession for 2022 through 2024 period. Buy I don't think anyone could have projected the level of federal spending through that period. That doesn't mean I wasn't wrong; it just means that there were inputs that had never been factored in to that extent before. Let's hope I'm wrong again. Economic slowdowns, once apparent on Wall Street, tend to be contagious on Main Street.

Markets

Equity index futures are broadly weaker on Thursday morning after what had been a positive day on Wednesday. Equity markets reacted well to the announcement that President Trump has given Ford Motor F, General Motors GM and Stellantis STLA a one-month reprieve on the implementation of tariffs on their Canadian and Mexican imports. For the session, the stocks of those three automakers rallied 5.8%, 7.1% and a whopping 9.2% respectively.

The Philly Semiconductors led the mid-major to major equity indexes on Wednesday at +2.09%. Of course, that was before Marvell Technology MRVL was bludgeoned overnight. The Dow Jones U.S. Software Index rallied 2.48% on Wednesday. Of course that was before MongoDB MDB was pummeled overnight. I may use the weakness in MongoDB to add to my longs in both Palantir Technologies PLTR and Snowflake SNOW on weakness.

Of the majors, the Nasdaq Composite gained 1.46% on Wednesday as the S&P 500 scored a gain of 1.12%. Nine of the 11 S&P sector SPDR exchange-traded funds shaded into the green for the session, led by the Materials XLB and Industrials XLI on the weaker dollar. Growth followed closely behind on strength in tech. Interestingly, the four defensive sectors tok four of the bottom six rungs on the daily performance tables despite the fact that these are places that investors hide when they get nervous about economic growth.

Here's the deal. Winners beat losers by about 2 to 1 at both of New York's equity exchanges. Advancing volume took a 74.4% share and a 75.6% share of names listed at those two exchanges and that is all good. But aggregate trading volume decreased on a day-over-day basis by 16.8% for names domiciled at the Nasdaq and by 13.9% for names listed at the NYSE. What does that mean? It means that a decent portion of professional managers under-participated in Wednesday's rally. That's sub-optimal.

Uh Oh...

Analyst Louie DiPalma of William Blair who has been negative on Palantir since at least March of 2023 ... has changed his tune. DiPalma upgraded Palantir on Wednesday from "Underperform" (sell-equivalent) to "Market Perform" (hold-equivalent). Palantir was trading with an $8 handle when DiPalma placed his negative rating on the stock and reiterated that bearish call a nearly uncountable number of times up until yesterday's change of heart.

Why "uh oh"? Well, I'm not sure that not being opposed to Louis DiPalma is a good thing for the stock. Not only is DiPalma rated at zero stars out of five at TipRanks, but the service rates him as the 9,227th best stock analyst of the 9,414 that they keep track of. Over the past one year, DiPalma's picks have been correct 52% of the time, but the average return on his picks is -18.8% according to TipRanks. Stuff you wish you didn't know.

Economics (All Times Eastern)

08:30 - Balance of Trade (Jan): Last $-98.4B.

08:30 - Initial Jobless Claims (Weekly): Expecting 243K, Last 242K.

08:30 - Continuing Claims (Weekly): Last 1.862M.

08:30 - Non-Farm Productivity (Q4-F): Flashed 1.2% q/q.

08:30 - Unit Labor Costs (Q4-F): Flashed 3.0% q/q.

10:00 - Wholesale Inventories (Jan-rev): Flashed 0.7% m/m.

10:30 - Natural Gas Inventories (Weekly): Last -261B cf.

The Fed (All Times Eastern)

3:30 p.m. - Speaker: Reserve Board Gov. Christopher Waller.

7:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: BJ (.87), BURL (3.77), CPB (.72), M (1.54)

After the Close: AVGO (1.51), COO (.91), COST (4.08), GAP (.37)

At the time of publication, Guilfoyle was long PLTR, SNOW equity.