ECB Seeds Europe Recession?

ECB raised rates. While Germany is in recession and several other nations are faltering.

US data flatlined as well. All this makes you wonder about equity market strength?

The ECB had signalled clearly that it would continue to raise rates for some time. That it has more work to be do in the perceived fight against inflation.

There is only one problem here. Well, several really. Germany is already in recession, and several nations are already faltering. Also, is it really appropriate to be raising rates against inflation when consumer and business activity is already slowing due to caution surrounding the war on on the EUs doorstep.

As has been the case in recent years, across several western economies, consumers appear to be reading the economic tea leaves more accurately than their respective central banks. Of course, if all central banks were really designed to do was fight inflation, I guess their current actions could be deemed appropriate. They are, however, suppose to deliver economic stability. Not wild rollercoasters at a hefty price.

This cannot end well. How could it when Germany is already in recession and you are raising interest rates with more to come.

The equity market seems as detached as the ECB. The German stock market just hit record highs while in recession, and with interest rates continuing to climb. One can only begin to be just a little circumspect about whether the current equity market euphoria is really justified, or is it indeed a liquidity splurge that will end in more than just a few tears?

Data in the USA yesterday could be best characterised as flatlining.

Retail sales seemed good on the month up 0.3%. However, as with all data of late being quite volatile, it is necessary to remain aware of the trend rather than an individual data point. Over the past 3 months retail sales are still down 0.2%. Over the previous four months since the spike due to weather, retail sales are still down 0.9%. Which makes it clear that it will take more than the latest 0.3% gain to encourage us to see anything other than a flat outlook.

Manufacturing output similarly managed a small rise of 0.1%, but treading water in a manufacturing recession is not really that exciting either. Then there was Industrial production which fell 0.2%.  Capacity utilisation and inventories were actually good results. No boom, but quite reasonable numbers.

Overall though, I suggest the evident slow down in the US economy may only quicken in coming months.

Stocks, as expected on the day, registered the previous day’s Fed pause on interest rates. Markets still chose to spin the tightening bias as there will eventually be an end to rate hikes? This is at least a big shift from the fantasy economics of expecting a pivot. That was never going to happen.

Stocks continue to defy gravity, with the only supports being the immediate AI euphoria, share buy backs, and the liquidity flowing from continued excessive government spending. It is possible such forces will continue to drive the market higher, but one would be perhaps mistaken to think there is not a problem, a flaw here.

Wall Street is tearing away from Main Street, but how long can it last?

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