In a note this week, analysts at Yardeni Research questioned whether the Federal Reserve will resume its dovish policies in response to recent economic data.
The financial markets seem to believe the Fed Put, a perceived willingness to cut rates to prevent market downturns, is back in play, according to the firm. This is based on the recent rise in expectations for rate cuts, fueled by weaker-than-expected economic indicators.
Yardeni Research acknowledges this shift but cautions against two assumptions. First, they believe inflation might not be subdued enough to warrant rate cuts even with an economic slowdown.
Second, they argue that the weak data doesn’t necessarily signal a recession. They point to the Citigroup Economic Surprise Index, which is currently negative but hasn’t historically dipped into recessionary territory.
Yardeni Research highlights the Federal Open Market Committee’s (FOMC) initial expectation of 6 to 7 rate cuts in 2023 due to stronger growth and inflation data. The recent economic data has some investors hopeful for a reversal, but Yardeni Research remains unconvinced of an impending recession.
Their analysis of the Job Openings and Labor Turnover Survey (JOLTS) report suggests a normalizing labor market, not a weakening one. While job openings have decreased, they remain historically high, and the quit rate has stabilized near pre-pandemic levels. Yardeni Research sees this as a sign of moderation in wage inflation and a positive development for productivity.
Finally, they point to the positive forward earnings breadth of the S&P 500, a metric that typically weakens during recessions. This, according to Yardeni Research, suggests we are still in the early stages of a bull market with further room for growth.
