I don’t scuba dive because I would rather stare at the water than insert myself back into the food chain, but I am aware of decompression sickness, aka “the bends.” If you surface too quickly, nitrogen bubbles form in the bloodstream and can cause dizziness, joint pain, paralysis, and even death.
It’s most frequently associated with scuba diving, but it can also happen coming down from high altitudes. Basically, anytime you decompress too rapidly you are at risk of the bends…which brings me to…
The Vacation Bends™.
You ever take a vacation (sans kids) and go too hard that first day? You decompress too rapidly and experience dizziness and some of those other nasty symptoms. If AirBnB has “OMG” categories, shouldn’t they add “Hyperbaric Chamber” as a search filter to help combat the Vacation Bends™?
For no particular reason, I thought about that a lot in Cabo last weekend…
And that, in turn, led me to think about the current state of the economy. I think the reaction to Trump’s policies can best be described as the Uncertainty Bends™. We decompressed too quickly and we’re experiencing dizziness and joint soreness. Given what we’re seeing out of consumers, there’s a chance spending paralysis is around the corner.
Left untreated, the Uncertainty Bends™ could even result in the death of the strongest labor market in history.
Scott Bessent is doing an admirable job of explaining the decompression process to markets, but I’m not sure his nuanced approach resonates with the USA Today crowd.
I’m hearing a lot that the Trump Put is further out of the money than some had expected, meaning he will tolerate more uncertainty before backing off. That sounds entirely plausible, but I still believe everyone’s a tough guy until people lose jobs. If the labor market holds up, the uncertainty has more room to run. If it turns, then I would expect a quick response from both Trump and the Fed.
Also, somehow, someway, The Rate Guy podcast celebrates 5 years of wildly uneducated and inaccurate rate chatter. That first one was entitled, “Why Flattening the Curve is Overrated” and made a whole bunch of people furious. The corresponding newsletter got over a million reads in 24 hours, crashed our site, and led to some death threats from telephone tough guys. Ahhh…the good ole days.
Last Week This Morning
10T: 4.25%
2T: 3.95%
SOFR: 4.29%
Term SOFR: 4.32%
Retail Sales: 0.2% actual vs 0.6% expected
The UK’s ONS (their BLS and BEA) will cease publishing PPI data due to data quality issues
The Uncertainty Bends
I thought Powell said all the right things but behind closed doors I think he is extremely nervous about the softening economy. I bet he secretly expects at least 0.75% of cuts this year.
Mark Zandi, Chief Economist at Moody’s, "Recession is ultimately a loss of faith – consumers lose faith they will have a job and thus stop spending, and businesses lose faith they will be able to sell what they make and begin laying off workers." He cited the Consumer Confidence Survey recent downturn.
This isn't just a minor blip. Consumer confidence has plunged to 57.9 in March, down from 64.7 in February and down 22% from the December post-election high. The consensus forecast was for a much smaller drop to 63.5.
As Columbia University professor Ethan Harris points out that every preliminary and final reading since December has been worse than the last. "Sentiment is trending lower with no bottom in sight."1
He also noted that a 22% drop in sentiment rarely occurs outside of recessions.
Tavi Costa, Macro Strategist at Crescat Capital, shared a chart spanning 45 years showing that consumers now believe business conditions are worsening at record levels.2 Think about that for a second…worse than the GFC or covid!
"I remember Druckenmiller explaining how he made much of his career by buying long 2-year Treasuries ahead of market turmoil," Costa notes. "With rates around 4% today, I believe now could present a very compelling opportunity to do the same."
This isn’t just “sentiment”, we're seeing clear evidence of changing consumer behavior. Neil Dutta, Head of Economics at Renaissance Macro Economics, reports that restaurant sales have collapsed 8.5% at an annual rate over the last three months - the weakest pace since early 2022. During this same period, grocery store sales advanced 6.2%, the fastest three-month clip since November 2022.3
"When households spend more dining out relative to dining in, it is a sign of optimism; when the opposite is true, I'd be more concerned," Dutta notes.
Keep all of your fancy stats and research and gimme the only Recession Indicator that matters…the Philly Sports Recession Indictor. If a recession is the price to shut up Patrick Mahomes, it’s a price I’m willing to pay.
Rates
Click here to read Wednesday’s post-FOMC blast.
I’ve been talking about a slowdown for two years now and even I believe the recent plunge in sentiment is overblown.
Even if the Fed is on edge about a softening economy, they can’t send dovish signals right now because of inflation. In that 1 year ahead sentiment graph, the second highest point of all time wasn’t the GFC or covid…it was 2022 when inflation was surging.
The fear of inflation will keep the Fed on hold in the face of weakening data. Dr. Claudia Sahm, Chief Economist at New Century Advisors, notes that the Fed is grappling with high uncertainty like the rest of us, making their forecasts more tentative.
"…the level of uncertainty in this SEP diminished an already weak signal," she writes.4
“Over four-fifths of participants said that the uncertainty around their GDP, unemployment, and inflation forecasts was higher than normal during the past twenty years - a big jump relative to pre-election forecasts.”
"With nearly nine months until the December 10 FOMC meeting, there is no shortage of catalysts that could shift expectations in either direction. Travel with caution," Sahm advises.
The Fed is dealing with the Uncertainty Bends™ just like the rest of us.
The Week Ahead
Friday is the main event, with Core PCE and personal spending. We also get GDP on Thursday. Obviously, tariff talk and Fed speak will also drive rates as the pop into headlines.