Market optimists make the case that 2022 will end on high note

‘As it’s happening, it will feel really good because inflation won’t be as strong as the Fed currently anticipates.’ Dutta said
Image: Kiyoshi Ota/Bloomberg

As corporate leaders increase their grim pronouncements about the future, there are still market economists who see stocks heading higher in the second half of this year and who say the US could sidestep a recession. Like all good statisticians, they have numbers to prove this.

Longtime bull Neil Dutta, head of economics at Renaissance Macro Research, for example, pointed to factors that are still returning to normal after the pandemic lockdowns, including labor participation rates and demand for durable goods, which drove prices higher. As life continues to settle down, he said, the Federal Reserve may find it easier to battle inflation.

“It’s a bit of a rebalancing. So you should see a little bit less inflation, a little bit more real growth. That should all be risk positive,” Dutta said by phone. “As it’s happening, it will feel really good because inflation won’t be as strong as the Fed currently anticipates.”

Whether the restrictive Fed will cause a recession has dominated the calculus of market handicappers for months, with the prevailing sentiment often determining any given day’s direction. Traders had little new to digest Tuesday, outside of a warning from Target Corp. that compressed margins could erode profits. Fed officials are mum ahead of their meeting next week and the data calendar is light until Friday’s inflation report. Stocks rose in another choppy session, as 10-year Treasury yields slipped back below 3%.

Here are the latest arguments from macro bulls on why risk assets could rebound in the second half:

Labour market

While the US labor market remains tight, signs of normalization can already be seen, Dutta said. He cited data from the National Federation of Independent Business, which showed plans of increasing worker compensation hitting a high at the end of last year.

“When unemployment is low, jobs growth tends to moderate. The trend in employment has clearly been slowing,” Dutta said. Labor supply, on the other hand, seem to be recovering quickly.

“Those aged 55 to 64 have participation rates higher than February 2020 while teenagers are back to pre-pandemic levels,” Dutta said, adding that “there is still room for participation rates to pick up.”

Durable goods

There is no question that prices of consumer durable goods soared during the pandemic, as stuck-at-home consumers bought new dishwashers and furniture at rates that exceeded the supply. There are signs this is changing.

The rate of industrial production in April saw the fastest four-month growth rate since October 2020. Renaissance Macro Research’s delivery times tracker slid to its lowest level since December 2020.

“An easing up of supply chains implies less inflationary pressures as factories can get goods out the door quicker,” Dutta said. At the same time, consumer behaviour is changing, with goods consumption slipping 1.3% as services consumption gains 1.2%. Less demand and improved production “ought to result in a drop in prices,” he added.

China’s Recovery

JPMorgan Chase & Co’s Marko Kolanovic said the past year’s deep selloff in Chinese equities could finally be on the cusp of a turnaround. The nation is loosening its restrictions as virus cases in major cities continue to fall.

At the same time. the nation’s year-long government crackdown on the technology industry appears to be easing. The Wall Street Journal reported that Chinese regulators were close to wrapping up their investigation of Didi Global Inc. The Nasdaq Golden Dragon Index jumped following that news and is up 20% in the past month.

“Any incremental improvement from the lifting of lockdowns, relaxing regulations, and further stimulus, should be beneficial for Chinese stocks in the coming quarters,” he wrote to clients earlier this week.

Consumer spending 

American households continue to spend at a healthy pace, particularly when it comes to services like travel and entertainment, according to data from Bank of America Corp. credit and debit card accounts. Aggregated credit and debit card spending was up 9% year-over-year in May, with credit card spending higher by 16% and debit card advancing by 4%.

“Our card data shows continued growth in consumer spending, but inflation is challenging households’ purchasing power,” David Tinsley, senior economist at Bank of America Institute, said in a statement. “That said, spending on services like travel and entertainment remained strong and households continued to have higher savings than they did before the pandemic.”

Economic activity

At Jefferies LLC, chief economist Aneta Markowska monitors a proprietary US economic activity index made of up of components including restaurant bookings, retail web traffic and transit data. The gauge rose in May after moving in a narrow range for much of the year.

“On the surface, this suggests that the economy hasn’t made much progress this year,” economists Markowska and Thomas Simons wrote. “However, under the hood, activity continues to normalize as the underlying components of our index slowly converge toward their pre-pandemic levels.”

They also said that there is no sign that labor demand is declining. “While there are anecdotes of localized layoffs, real-time data suggest that the total number of unemployed continues to decline,” they wrote. The number of people finding jobs is outpacing the number of people losing jobs.”

© 2022 Bloomberg

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