Mikael Sarwe
@MikaelSarwe
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Head of Nordea Equity Strategy & Quant. In grey zone between macro & market strategy. If you can't show it in a chart then it's not true. Views are my own.
Stockholm, Sweden
Joined August 2012
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Thinking about it... Maybe Sweden needs -0.5% repo rate to balance the 77% effective marginal tax rate (income, payroll, consumption taxes)?
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🌎 I have in my 30 years as an economist, strategist and portfolio manager NEVER seen any monetary tightening like this.
Welcome to 2023...
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🇺🇸 As goes housing, so goes the economy... Home sales have already tanked, house prices are next. Wealth effects should look awful for personal consumption in 2023 (or earlier).
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🌎 Where I disagree with the current equity market sentiment... monetary tightening takes time to run through the economy. My models still say later, deeper and longer recession...
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🇸🇪 Sweden in recession according to Q4 GDP. Two points to make:
1) It will get much worse
2) I view Sweden as a canary in the global coal mine
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🇸🇪 Weakest retail sales numbers ever. -7.7% y/y. And it looks like it could get worse...
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🇸🇪 A toxic combination that should hit the economy over the coming 6 months. We have never seen anything like it in modern history. And of course not only a Swedish phenomena...
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🇺🇸 Spot the similarities between now and the summer of 2008? And the big difference?
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🇺🇸 I note a growing consensus on FinTwit that sticky inflation is a consensus view. I doubt that. If it was, then the US 10-yr yield wouldn't be 1.6%. Historically, such a low yield has been in line with 1.5-1.7% core inflation, ie the bond market believes the transitory story
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🇺🇸 Bear market bounce in July from extremely negative sentiment levels and oversold conditions. Also helped by P/E expansion driven by lower bond yields.
But be careful. It's not like the earnings outlook has improved, quite the contrary...
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🇺🇸 Equity market once again trying to cheer "pivot" data in the form of JOLTS job openings. But maybe it's time to be a little careful what you wish for...
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🇺🇸 I wonder what happened to the Fed statement that it wasn't going to repeat the mistake of the 1970s and cut rates before wage growth allowed for it. Atlanta Fed's wage-tracker remained over 5% y/y and NFIB compensation plans warn of an acceleration in 2024. Just sayin'...
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🇺🇸 Unemployment trend consistent with recession. And should continue to rise...
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🇺🇸 A new consensus seems to be that the stock market could survive a mild US recession without making a new low. My model indicates a slightly worse
recession and since 1950 the market has never bottomed before any recession started. And it hasn't started yet.
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🇺🇸 The most important conclusion from the Consumer Confidence survey to me is that it now looks quite obvious that unemployment will rise through 2024, meaning that the US will enter a recession. Also, that is when bear markets for equities have started for real in the past.
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🇺🇸In the previous 5 Fed cut cycles, 2 of them led to bull markets (1995 & 1998) and 3 to bear markets (1989, 2001 & 2007). In my mind the difference is if there was an earnings recession or not. Currently my leading EPS indicator clearly signals earnings recession...
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🇺🇸 One, two, three, four...
... this is why I continue to be such a bore 😵💫
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🇺🇸 Unemployment at 14.7% is high in one sense, but still a very poor indicator of how bad it actually is. Employment to population dropped to 51.3%. That says it better - only half of the population has a job...
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🇺🇸
CEOs: Recession Ahead!!!
Equity Investors: Who cares!!!
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🇺🇸 Can someone remind me what happened with the equity market the last time the trend in (fictional?) operating EPS diverged massively from earnings from a true national income perspective?
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🇸🇪 GDP -0.9% y/y in Q4. Recession as expected. It should unfortunately get much worse during 2023 according to my models.
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🇺🇸 The previous times job openings fell this much from the highs, the US entered a broader NBER recession.
Admittedly, the level of openings is still extremely high this time, so we will see if the signal is as correct as in the past. But my guess is that it is...
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🇺🇸The Phillips curve ain't dead. It's just unemployment that has become a bad indicator of labour market strength. Use employment to population instead and the relationship with wages is as strong as ever.
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🌎Heading into the Midsummer holiday, my macro models still look very ugly. 2022 was never a problem. H2 2023 and likely H1 2024 should be. Paraphrasing Daft Punk... it should be a Slower, Later, Deeper, Longer recession than equity markets are assuming. Have a great summer!
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🇺🇸If money matters to the stock market, then it seems that this rebound likely is a bull trap...
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🇺🇸 The market sees the CPI report as benign. Still, I would say that leading inflation indicators are moving slightly in the wrong direction. My CPI model has CPI close to 3.5% y/y in Q2 2024. Too high for the Fed. It's been fairly correct so far...
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🌎 Monetary policy works with a quite long lag. You never know exactly where the effect pops up first. But eventually it likely will drag earnings into a lengthy and deep recession. As in the early 2000s and the financial crisis. I remain in the "better safe than sorry camp"...
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🇺🇸 Could it be that it in retrospect will turn out that the US entered a recession early 2024. That is what the household employment data indicates....
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🇺🇸 Let's sum up recent events... Even with various bail-out/bail-in packages - do you think the bank willingness to lend will increase or decrease the coming months?
Exactly.
And the willingness was already in recession territory before the past couple of weeks...
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🇺🇸 Initial jobless claims and WARN notices. The plot thickens...
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🇺🇸For the first time in many many years, my leading unemployment indicator has started to point north. Times they are a-changin'
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🇺🇸 The short squeeze continues. But stronger headline Philly Fed hides a more troublesome future. My Philly earnings indicator still points to marked earnings recession in 2023.
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🇺🇸 US economic surprises the most negative in a long time. Market reactions still very muted, however...
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🇺🇸 Philly Fed and earnings expectations. Not a pretty picture...
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🇺🇸 So the Fed is OK with the largest rate cuts ever discounted over the coming 18 months, despite small business price plus compensation plans high and rising. And median/sticky CPI accelerating the past three months. Didn't see that one coming...
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🇺🇸📉Philly Fed. Look out below. Earnings estimates for 2023 should get slashed brutally...
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🇺🇸 Philly Fed... slightly difficult to square with the "no recession" storyline out there. But of course, orders minus inventories can probably not get worse.
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🇺🇸 Weak underlying Q4 GDP with inventories and government spending behind 3/4 of it. Also, data published during January pushed my leading GDP indicator deeper into recession.
Tread carefully in this short squeeze...
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🇺🇸 The equity market has never dropped during the 3rd year of the Presidential Cycle (2023). True
But also true is that there has never been a recession in the 3rd year
I think there will be a recession in 2023, which should be more important for equities than numerology
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🇺🇸 Not sure I trust my trusted old US CPI model currently. But the CPI numbers for March, April, May and June will for sure be funny to watch 😱
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🇺🇸 NAHB slight bounce but already in deep recession territory. IP and retail sales gradually aligning to the recession story.
My 12-indicator US GDP model spells recession & has since 1970 always been right when predicting one. EUR model in recession.
Just sayin'...
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🇺🇸 The underlying demand components of US GDP Q1 look fine. But... my old trusted 15 component leading GDP indicator has started to warn about a more pronounced slowdown in H2 2022.
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🇺🇸 In the midst of the "magnificent 7" FOMO Santa rally storyline. Hmmm...
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So Buffett's Berkshire has record cash level. Wonder why...
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📉Many point to falling used car prices as something positive given that it could be part of bringing inflation down. Personally, I would rather be worried since the equity market historically has fallen as long as used car prices have. So, be careful what you wish for...
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🇺🇸 Philly Fed: Q3 EPS estimates not the problem. It's rather Q4, Q1, Q2...
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🇺🇸 Equities catching a bid on interest rates falling due to weak JOLTS and consumer confidence. Reasonable in the short-term (?), but note that falling job openings is a recession sign that eventually has triggered the opposite equity market reaction in the past.
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🇪🇺 Composite PMI... All together now... Monetary policy works with a long and variable lag...
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🇺🇸 Being in the recession camp is never a walk in the park. Particularly since recessions often don't show up in economic data until after a number of revisions. 2008 is a good example. My GDP model however still says that there will be a marked recession in 2023....
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🇺🇸📉 The equity market is in full pivot mode and is cheering a lower PPI print than expected. Do remember, however, that a falling PPI (not there yet) is a quite clear indication of an earnings recession.
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🇺🇸 The forward-looking data flow has not been kind during May. My broad GDP model suddenly dropped into negative territory. I always hope for the best (but plan for the worst...)
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🌎 Summing up the 2023 equity market outlook in 2 charts...
1) The "nominal illusion" is disappearing and we should enter a severe earnings recession
2) The Equity Risk Premium is way too low for such a scenario
I expect marked new lows for equities during H1 2023
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🇺🇸 Wake up
@federalreserve
! NFIB was very "anti-transitory". Labour demand => wage increases. Wages + other costs + slowdown tendency => profit margin pressure => broader price hikes = inflation!
All explained in 4 charts
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🇺🇸 Apartment list's rent data for recent movers continues to soar. Now 15% y/y. Good luck with the transitory rhetoric, Jerome Powell...
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🇪🇺 Business cycle starting to look shaky to say the least...
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🇺🇸 Old COVID-19 stimulus checks and perhaps other fiscal effects have wreaked havoc with my US GDP models in 2023. But the unemployment model seems to be alive and well. Or I don't know about well...
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🇺🇸 I kind of wonder what US households think of the Fed's happy "bump on the way to 2%" rhetoric?
The price level is up 20%+ since 2019 and the CPI trend has remained more upward sloping than the 10 years before Covid-19.
Fed credibility to be questioned again?
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A "famous last words" tweet... The trend & momentum are kings. But I have rarely seen the equity market as short-term stretched as now. Nordea's Fed strategists have warned about a serious US liquidity slump in Q2 for some time, which could be problematic for markets in general
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🇺🇸 Haven't seen this one before but it rhymes with my thinking so I thought I would post it. Michigan Retail Index...
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🇺🇸 I still think there is a substantial chance that markets and economists will be surprised by higher unemployment (globally) in 2020 and thus gradually weaker domestic demand. JOLTS data last week complemented the signal from my survey-based model quite nicely in that respect.
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🇺🇸 Missed this last week. NFIB labour data. Job openings have started to drop in a way historically only seen in recessions. But long live FOMO🙂
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🇺🇸 When a bond market bear steepens it is saying that it is afraid that the central bank is losing control. As a central bank you don't react by saying that long-term bonds is doing the job for you. Particularly when the term premium only is zero. Rookie mistake by the Fed...
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🇺🇸 I suppose the equity market is betting on that the Empire Fed survey is an aberration...
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🇺🇸 Empire future general activity slumped from 25.7 to 13.7 and is one of nine indicators in my purely survey-based GDP model. The model is starting to look quite frightening.
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FED’S GOOLSBEE: TOTALLY CLEAR THAT INFLATION’S COMING DOWN. EVEN IF INFLATION COMES IN A BIT HIGHER OVER NEXT FEW MONTHS, STILL CONSISTENT WITH OUR PATH BACK TO TARGET.
If the facts don't fit, then disregard them. The blinders are still on I suppose...
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🇺🇸We are starting to see a similar divergence as last summer when S&P powered ahead, but cyclicals started to underperform defensives. Back then it, in retrospect, was an obvious warning sign about what was about to happen...
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🇺🇸 My old short-term US CPI model continues to work relatively well... Still, however, I very much doubt that 3% y/y CPI by September will be enough for the Fed to truly pivot and cut in Q4...
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🇺🇸 ECI: Wage growth remains way too high for any Fed pivot.
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🇺🇸 The Fed has been looking for broadening inflation. Well, now they have it. Median CPI jumped 0.5% m/m to 2.8% y/y. Small businesses moreover indicate that this is only the beginning...
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🇺🇸 The story of "the pivot".
First, a Fed pivot meant a turnaround to rate cuts.
Then it became the Fed halting rate hikes.
Then it turned into smaller rate hikes.
Now it almost feels like a Fed pivot simply is the Fed having a monetary policy meeting.
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🌍🇩🇪 Still waiting... When will equity analysts wake up and slash EPS estimates for real?
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🇺🇸 Initial jobless claims... Monetary gravity takes time, a looong time... But it actually looks like it's possibly happening now... And historically the labour market has decided where equities are heading...
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🇺🇸 Apartment lists rent for recent movers surged to a new high in June, now up 8.3% y/y. As we have been saying since early 2021, rents should be the next CPI SHOCKER taking over from used cars after the eviction moratorium ends in July
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🇺🇸 SLOOS... Willingness to lend to consumers dropped again. Indicates a worsening GDP outlook H2 2023. If history is any guide, it also points to NFP dropping by 2% y/y early 2024...
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🇺🇸 Although FOMC minutes included some saying rates "might need to be raised", our old Fed model continues to point to a growing probability for rate cuts. That said, the Fed will be as late in starting to cut as it was too late in starting to hike.
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🇺🇸 With the US Government busy delivering the most irresponsible fiscal policy for the past 40 years, it's a little odd that bond investors aren't demanding more of a risk/term premium...
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🇺🇸Are we seeing a similar breakdown of various "leading" market based indicators as last summer, before the equity market crash in Q4?
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🇺🇸 Hey equity investors. You are not getting paid for the risk...
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🇪🇺 Maybe someone should inform Villeroy that monetary policy works with a quite long lag. It's the second half of 2023 that is problematic, it was never 2022...
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🇺🇸 Off Friday so late NFP tweet...
NFP starting to look odd. Households basically say no employment growth since March, NFP says +2.5 million.
Also, odd net birth/death business numbers & not sure about seasonal adjustment used.
I would be careful about trusting NFP right now
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🇺🇸 With NFIB price components dropping, my US model indicates CPI at 2.5 %-ish y/y mid-2023.
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🇪🇺 My favourite time of the month! Let's repeat: Sweden is a small open export oriented economy and thus a leading indicator for Euro Area. No surprise that manufacturing PMI drops. That trend should continue. The slowdown isn't over yet.
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🇸🇪 It unfortunately looks like the labour market part of the Swedish recession has arrived...
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🇺🇸 Nominal retail sales since March 2021: +5.6%
Real retail sales since March 2021: -6.5%
That's inflation doing its dirty work
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🇺🇸🇸🇪Suppose I should tweet about Fed/Riksbank. But I find it much more important that Fedex says that demand for their services shows global growth slowing in a way that has been seen "in a severe recession" h/t
@Halsrethink
. Hmmm...
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🇺🇸 The Employment Cost Index wishes you all a non-transitory Halloween weekend 👻🎃💀
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