It could be a soft landing

Apollo Chief Economist

This is the most anticipated recession ever. Maybe it is so anticipated that firms and households are so prepared for a slowdown that we may end up not having a recession.

There are two important reasons why we could get a soft landing:

  1. Corporate profit margins are near all-time highs, and corporate cash balances are near record-highs, which gives companies room to absorb declines in demand without having to lay off workers, see the first chart below.
  2. Consumers have record-high savings, which means that households will still have money to support consumer spending even if the unemployment rate starts rising, see the second chart.

The bottom line is that we could get a soft landing because both firms and households have significant buffers to deal with a negative hit to demand and incomes.

The implication for markets is that once the Fed pivots from hawkish to dovish, either because of inflation rolling over or growth slowing, credit markets and stock markets could move higher. The next data release to watch is the employment report this coming Friday, where the consensus currently expects nonfarm payrolls at 275,000, unemployment at 3.6%, and average hourly earnings at 5.1%.

Any softening in the labor market and, in particular, in average hourly earnings would push the Fed in a more dovish direction because it would mean that the Fed has finally succeeded in slowing down the economy and ultimately inflation.

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