Soft or Rough Landing? Rising oil price. Is the U.S. agency going on unpaid leave?
Chart of the week
The chart shows which financial market indicators currently point to a soft landing for the U.S. economy following the unprecedented interest rate hikes by the U.S. Federal Reserve, and which point to a rough landing.
Currently, six indicators are pointing to a hard landing and only three to a soft landing. Another seven indicators are currently not giving a clear signal.
Soft or rough landing?
Central banks have the task of keeping inflation low. In the USA, they also have the task of ensuring full employment.
This task is not easy. When inflation is high, central banks combat this with higher interest rates to cool the economy. However, the full effect of a rate hike on the economy is not seen until 6-8 months after the rate hike.
If a central bank manages to cool the economy so that growth is close to zero but still positive, it is called a soft landing. If it raises interest rates too much, the economy can slide into recession. That's called a hard landing.
What is the track record of central banks in the past? The picture is very clear there. Since the Second World War, there have been 12 cycles of interest rate hikes. Central banks have only managed a soft landing once, in the 1990s. Otherwise, there was always a hard landing or a recession.
Nothing against positive thinking, but if something hasn't worked 11 out of 12 times, it's more likely not to work now.
In recent weeks, investors have become somewhat more realistic. More investors now expect a recession to be more likely.
The press conference of the U.S. Federal Reserve and the statements of its head Jerome Powell in particular contributed to the negative mood. When asked how he intends to manage a soft landing for the economy, he said "The goal is to fight inflation, if that requires a recession, then so be it." This statement hit like a bomb and caused a rethink among many investors.
The chart shows the voting behavior of the members of the Federal Reserve (blue dots). Just a month ago, the dots for 2024 were spread exactly since as for 2025. Now, most voting central bank governors do not see interest rates falling again until mid-2024.
The chart shows the yield curve for government bonds in the USA. The change in the Federal Reserve's opinion led to a general increase in the yield curve compared with last week (blue). This led to losses especially for long-dated bonds.
What we are currently observing is a very unusual picture. The inverse yield curve seems to be triggered by "bear steeping". In this process, both long-term and short-term interest rates are rising.
Typically, the inverse yield curve resolves itself through "bull steeping."
Long-term interest rates are falling less than short-term rates. The next few weeks will show whether this trend will continue or whether it is just an overreaction to the statements made by the U.S. Federal Reserve.
Rising oil price
What also worries many investors is the rising oil price, which is now back at USD 100. If it remains at this level, we can already see that inflation will rise again.
The chart shows how much inflation will increase in the USA, Europe and the UK if the oil price is USD 100 at the end of October. Compared with the lowest price in July 2023, the oil price has increased by more than 30%. This is mainly due to the behavior of OPEC to reduce production volumes. Here, Saudi Arabia is predominantly taking the lead and is thus naturally playing into the hands of Russia, which is urgently in need of a higher oil price.
Is the U.S. government agency going on unpaid leave?
On the weekend, an hour before midnight, the closure of all less important US authorities could be applied. But the House could only agree on a stopgap budget until Nov. 15.
What is at stake here? In the spring, when the increase in the U.S. debt ceiling was being discussed, an administration shutdown was also already on the table. But that was a different issue that was resolved,
Now the issue is the administration's regular budget. The House cannot agree on a new budget. In such a case, all non-central government units will be hired. What will not be discontinued is police, hospitals and most of the military.
That there will be such a closure of the authorities is something that has happened relatively often.
The chart tabulates all government shutdowns since 1976. Most closures lasted only one day, but a new record of 38 days was set under ex-President Trump.
The chart also shows agency closures in the U.S. since 1976. 1977, 1995 and 2018 were the most extreme cases.
The first step is to close national parks and all museums. That's probably the first thing many notice. But it hits all companies that depend on government contracts or need a permit from the government. None of this is possible in a shutdown.
Past experience shows that U.S. gross domestic product drops by 0.2% per week in a shutdown. For a month, this would be 0.8-1%. Many market economists expect the U.S. economy to grow by 2.1% in 2023. So just under half of the expected economic growth would be at risk with a prolonged shutdown of one month.
Since all government employees will not receive any wage payments during this time, this would also hit consumption, and this precisely on the strongest sales days of the year, Black Friday on November 24.
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