Where is the Recession?

Key points

  • A progress report on inflation: Inflation appears to have peaked, led by improvements in core goods prices and rate-sensitive sectors like housing. The policy focus has shifted to labor market normalization where early signs of progress are emerging.
  • Is a soft landing in sight? The Fed remains committed to doing “whatever it takes” to bring inflation to the targeted level. Despite the aggressive tightening we’ve seen so far, alternative data indicators suggest that the economy remains on relatively solid footing.
  • Equity market positioning: We are positioned for themes of continued high rates, improving sentiment outside the US, and a potential soft economic landing. This is expressed with a preference for value—particularly in cyclical sectors including capital goods, consumer durables, autos, and airlines.

2022 was a year where extreme macroeconomic and geopolitical events shaped market behavior. The US Consumer Price Index (“CPI”) peaked at 9.1%, the highest level in over 40 years. The subsequent policy response saw the US Federal Reserve (“Fed”) deliver 4.25% of rate hikes across only seven meetings. This was the fastest cycle of rate hikes since the early 1980s, a period of stubborn inflation and aggressive policy action that ultimately ended in a recession.

As we begin 2023, there’s a greater level of clarity around some of the questions that have driven markets over the last year. Recent inflationary data shows improvements in the trajectory of core goods prices and rate-sensitive components. Now, the focus of policymakers has shifted towards restoring balance in the labor market and doing “whatever it takes” to bring inflation to the targeted level. As we enter a new phase of tightening beyond peak price pressures, what does alternative data reveal about the path of inflation and the recession that so many are expecting?