China is slowing, Europe is slowing, and the US economy is also in the process of slowing down over the coming quarters.

As a result, commodity prices are falling.

Prices for energy, which make up almost 60% of the S&P GSCI, are declining because of weaker demand from China and more energy supply in the US.

Agriculture prices are falling, in particular soybean, driven lower by weaker global growth. But there are exceptions such as coffee, cocoa, livestock, and orange juice, where low supply is important.

Industrial metals prices are falling because of weaker global growth. For precious metals, gold prices are rising as households in China diversify away from falling Chinese property prices and falling Chinese stock prices. Central banks are also buying gold.

Our latest commodity outlook chart book is available here.

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The business cycles in China and India are decoupling after having grown in sync for decades, see chart below.

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The map below shows the share of primary energy consumption coming from renewable sources across countries, and the bottom line is that there is a significant need for investment in renewable energy around the world.

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The number of publicly listed companies has also declined in the UK, see chart below.

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The daily data for the past week shows that restaurant bookings are still strong, TSA travel data is still strong, and tax withholding data is still strong.

The weekly data shows that jobless claims improved, weekly retail sales data is still strong, weekly hotel demand remains strong, weekly data for bank lending is growing, weekly data for bankruptcy filings is trending lower, weekly data for Broadway show attendance is strong, weekly box office grosses are strong, and weekly S&P 500 forward profit margins are near all-time highs.

There is some mild weakness in the weekly Census business formation statistics and the ASA temp worker staffing index.

Combined with the strong GDP report for the second quarter, the bottom line is that some pockets of weakness are emerging, but the high-frequency indicators show that overall growth remains solid. Consistent with the latest GDP report and the latest monthly report for retail sales.

Bottom line: There is nothing suggesting that the economy is currently in a recession or about to enter a recession.

Our chart book with daily and weekly indicators is available here.

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The gap between Fed pricing and long rates continues to widen, suggesting that factors other than Fed expectations, likely including the fiscal outlook, are beginning to play a role for long rates, see chart below. For more discussion, see also here.

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The consensus has in recent weeks lowered the outlook for consumer spending modestly, see chart below.

If the economy starts slowing down, the speed of the slowdown becomes essential. A faster slowdown would have negative implications for earnings and increase the probability of a sell-off in stock markets and credit markets.

The bottom line is that the incoming data points to solid growth. However, the consensus has recently been revising the estimate for consumer spending growth, and we are carefully watching the incoming data to see if this is just a small adjustment or the beginning of a more meaningful slowdown.

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During recessions, Treasury issuance shifts to T-bills, partly because during recessions, short rates are low and T-bills are a cheap source of financing, see chart below. So why is T-bill issuance so high today when the fed funds rate is high and the yield curve is inverted?

And what will issuance look like if the economy is slowing down and we enter a recession later this year? If the Fed starts cutting in September and issuance shifts to coupons, it will likely lead to a steeper curve.

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Let’s assume that the economy is finally slowing down.

If it took the Fed two years to slow the economy down, then once the Fed starts cutting rates, it will take two years for the economy to reaccelerate. As a result, cutting rates in September will not be enough to prevent a recession.

In other words, with the consensus expecting a soft landing, the key question in markets today is why the transmission mechanism of monetary policy should be asymmetric when the Fed is cutting rates versus raising rates.

If the long and variable lags are symmetric, it should take two years before the economy accelerates from when the Fed starts cutting in September 2024.

The consensus sees a 30% probability of a recession within the next 12 months, see chart below. The consensus likely thinks that the lagged effects of Fed hikes will eventually slow down the economy.

To be sure, we do not expect a recession, see also here. But this is what the Fed’s symmetric logic about long and variable lags would imply.

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Small-cap companies have a higher share of floating rate debt, see the first chart. Specifically, floating rate debt as a share of total outstanding debt for the Russell 2000 is 51%. For the S&P 500, the share is 25%.

Put differently, small-cap companies are more vulnerable to Fed hikes and rates staying higher for longer.

Even after the Fed turned dovish in December 2023 and rates started coming down and credit spreads started tightening, small-cap earnings have shown no signs of a rebound, see the second chart.

This confirms the extreme concentration in the stock market. Small-cap earnings expectations remain weak even in a strong economy with yield levels coming down. The likely reason is that 41% of companies in the Russell 2000 have negative earnings, i.e., very poor credit fundamentals, see the third chart.

If we get a soft landing with inflation coming down and the Fed cutting rates, then earnings expectations should begin to rise for both small-cap and large-cap stocks. But this is not what we are seeing.

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