U.S. equities, bonds, and commodities ended last week on a higher note, driven by new data showing the economy is heading for a soft landing.
Soft-landing, also known as the “Goldilocks” economy, is a situation of slow economic growth and tame inflation, which is the case according to data released last week by the federal government and private agencies.
Early in the week, the Census Bureau said that durable goods orders excluding transportation increased monthly by 0.7% in January, following a 0.4% drop in the previous month, and slightly above market expectations. In addition, house prices rose at an annual rate of 6.6%, the least since June 2020.
Towards the end of the week, the Bureau of Labor Statistics reported that jobless claims for the week ending Feb. 25 dropped by 2,000 to 190,000 — slightly below market expectations of 195,000 and close to the nine-month low of 183,000 at the end of January.
Unit labor costs advanced an annualized 3.2% in the fourth quarter of 2022, ahead of Wall Street estimates of a 1% rise but well below an upwardly revised 6.9% rise in January.
In addition, the S&P Global U.S. Composite PMI came at 50.1 in February, in line with Wall Street expectations of 50.2 but above January’s 46.8, a sign of steady growth returning in the private sector.
Meanwhile, ISM Non-Manufacturing Prices dropped to 65.60 points in February from 67.80 points the previous month.
Soft landing is an ideal macroeconomic environment for most classes of assets. For instance, it’s good for equities, as it helps companies grow their earnings at a moderate rate. But that’s much better than an outright recession, which could lead to negative earnings growth.
Soft landing is good for commodities, too, as moderate growth help sustain demand for energy and raw materials used by factories at home and abroad.
In addition, a soft landing is a conducive environment for fixed-income securities like long-maturity Treasury bonds sensitive to inflation.
It explains the rally that was seen towards the end of the week in all three asset classes.
“Most of what has lifted stocks this week is the continuing hope for a soft landing even as the February economic data has shown inflation to be more stubborn than expected,” economist Peter Earle told International Business Times. “Data showing that Chinese factories are ramping up again adds some buoyancy.”
Amanda Agati, the chief investment officer at PNC Financial Services Group, doesn’t share Wall Street’s rush to the conclusion that the economy is heading into a soft landing.
And she isn’t impressed by the recent Wall Street rally either.
“Markets have been fighting the Fed ever since the CPI report back in November 2022 came in well below consensus expectations,” Agati told IBT. “That’s what catalyzed the shallow-quality rally we’ve seen leading the market higher ever since.”
Agati asserts that Wall Street has shifted from a pretty “delusional” market rally to a “reality check” in relatively short order, as technical indicators have started breaking down, market leadership is rotating and evolving, bond yields are rising, and rate hike expectations are shifting higher.
Anthony Denier, CEO of Webull, is of a similar opinion.
“The market is quick to push stocks higher at the hint of any good news, but inflation still isn’t under control, and that will be the main indicator of where the stock market is headed,” Denier told IBT. “If the Fed raises rates more than expected, that will lower the market.”
Traders and investors will better understand what the Federal Reserve plans to do with interest rates next week when Chairman Jerome Powell testifies Wednesday to the House.
Then there’s the February labor market data release on Friday and the Feb. 14 CPI data, which the Fed monitors closely in setting monetary policy.
“If the employment numbers that come out on March 10 show substantial strength and the February CPI numbers show persistently high prices, the market is likely to reprice in a way that factors in a higher terminal rate for Fed policy — perhaps as high as 6%,” said Earle. “What that means in terms of an S&P 500 price is impossible to say, but higher employment and slower disinflation mean a higher likelihood of a recession.”