Growth concerns replace inflation woes

Maybe the title should read “add to,” instead of “replace,” because inflation is everywhere and still very hot. But recent US data as well as things like falling shipping costs, energy prices, and easing supply constraints all suggest the worst may be over. That does not mean everything will cost less, of course, but the rate of price increases will slow down. But worryingly, we are getting more and more recessionary signals, and this is what’s going to drive financial markets going forward.

The US dollar fell sharply again today as concerns intensified that the economy is heading for a recession after a poor set of PMI numbers came out from the services and manufacturing sectors. An economic slowdown is expected to weigh on inflation, reducing the need for the Fed to maintain an aggressive tightening stance. For now, stock markets have remained supported as optimism over a less hawkish Fed is outweighing growth concerns. But I can’t imagine investors will continue to take excessive risk heading into a potential recession. Then again, markets can remain irrational… you know the rest.

Anyway, for now, the dollar is weakening, and stocks are holding their own remarkably well as bond yields continue to fall. The manufacturing PMI fell into contraction at 47.6 compared to 50.4 last and expected, while the Services PMI slipped to 46.1 vs. 48.0 expected and 47.8 in the previous month.

Accordingly, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“Business conditions across the US worsened in November, according to the preliminary PMI survey findings, with output and demand falling at increased rates, consistent with the economy contracting at an annualised rate of 1%.”

But not all of today’s US macro releases were bad. The UoM’s sentiment index for example improved to 56.8, more than expected, from 54.7, while new home sales printed 0.632M versus 0.570M expected.

Earlier in the day, PMI data out of Europe’s largest economies improved somewhat. But let’s not get too excited because they rose from a very low base and in any case still remain in the contraction territory, which is hardly any reason to be cheerful.

But I will repeat. Although equity markets have shrugged the PMI numbers off for now, I can’t imagine investors will continue to take excessive risk heading into a potential recession. The global economy faces a bumpy road ahead. The bears are ready to pounce, but are in need of a technical “sell” signal.